Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, June 29, 1993

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I am here this morning to discuss recent steps taken by the Federal Reserve, in cooperation with the other federal bank regulatory agencies, to reduce regulatory burden on financial institutions and to facilitate an increased flow of credit. The regulatory burden on depository institutions has taken on new importance after enactment of the Financial Institutions Reform, Recovery, and Enforcement Act. 1989 (FIRREA), the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the evidence of restrained lending by banks. The costs to commercial banks and to other depository institutions of adhering to banking laws and regulations continue to grow and, despite the industry's recent record profits, could begin to threaten the industry's long-term competitiveness. I have testified several times in recent months on these and related matters and would hope that the increased attention given to these topics can lead to meaningful reductions in regulatory burden for the banking system.

Having said that, and before discussing details of new initiative, I would like to emphasize the limited ability of the regulatory agencies to encourage a pick-up in loan growth through administrative actions and also the inherent risks of attempting to reduce regulatory burden substantially by simply changing regulatory or supervisory policies and procedures. The results of lender surveys taken by the Federal Reserve have consistently indicated for several years that the slow or negative growth of bank lending has been more a result of weak loan demand than of any other factor.

Changes in supervisory or examination practices may help at he margin, but they are unlikely to produce fundamental changes in credit conditions. That is the case for many reasons, mostly dealing with the recent recession and the need and desire of both businesses and consumers to strengthen their balance sheets. The large number of bank failure during the past half-dozen years also indicate that credit standards at many banks need to be improved. It is important, therefore, that any regulatory policy changes designed to spur additional bank lending not weaken the fundamental supervisory process. Recent actions we have taken have been carefully designed with that principle in mind.

Recent Policy Announcements

The federal bank regulatory agencies realized before passage of FDICIA that their supervisory actions may impose undue burdens on some banks and may unnecessarily constrain bank credit availability. Consequently, in late 1991 the agencies issued joint statements that clarified their examination policies regarding commercial real estate loans and encouraged banks to work with troubled borrowers to resolve problem loans.

More recently, we have jointly taken numerous other efforts to reduce regulatory burden, while still adhering to relevant banking laws and fundamental principles of bank supervision. Several initiatives were announced on March, and further details have subsequently been put forward, including a series of policy statements that was issued on June 10.

March Policy Statement

The March statement sought to improve credit availability to small and medium-sized businesses and farms, and it covered other supervisory issues as well. Perhaps the most important element of the statement was the announcement of forthcoming changes to agency rules regarding the need for real estate appraisals by certified or licensed appraisers. Such appraisals, which relate to a requirement of title XI of FIRREA,have been controversial and costly of banks and to their customers. If the proposed rules are adopted, appraisals will be required less often.

The proposed change, issued for comment on June 10, would (1) increase the threshold amount for which such appraisals are required from $100,000 to $250.000, (2) expand the "abundance of caution" exemption so that an appraisal is not required to the decision to make the loan, and (3) exempt from appraisals business loans of less than $1 million when the principal source of repayment s not the sale of, or income from, the real estate held as collateral. …