Magazine article American Banker

To Ease Credit, Clinton Should Push Congress Instead of Jawboning Bankers and Examiners

Magazine article American Banker

To Ease Credit, Clinton Should Push Congress Instead of Jawboning Bankers and Examiners

Article excerpt

Should banks make loans more on the basis of borrowers' character than collateral or cash flow?

Should bank examiners ease up on lenders to facilitate loans to small businesses?

President Clinton has made clear he believes the answer to both questions is yes. And he has urged bank examiners to be less strict in enforcing rules and regulations.

As one who has observed the banking industry first as a bank examiner and then as a financial analyst, I doubt that either of these ideas will work. The President's plan is well intentioned, but he's approaching the problem from the wrong direction.

Within reasonable limitations, there's nothing wrong with character lending. In fact, it is nothing new. Typically, a banker will say, "I've done business with you for 20 years, I know you, I trust you, I know your business. I'll give you a loan on a handshake."

But bankers are going to be skittish about lending on the basis of character when they don't know the prospective borrower.

Good character and never having declared bankruptcy don't equal creditworthiness. Bankers should and will insist on thorough credit checks, analyses of business fundamentals, and evaluation of collateral. This is just prudent business.

Examiners Go by the Book

As for the bank examiners, they're not likely to be influenced by anything less than a change in the regulations they're supposed to enforce. Examiners aren't paid to be relaxed; like any regulators, they are supposed to protect the depositors and maintain the integrity of the banking system.

That attitude is perfectly understandable. The examiners remember the 1980s, when some of them were hauled before Congress and asked how they could relax standards and allow certain lenders to fail.

President Clinton also seeks to reduce overlapping examinations by the banking regulators. …

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