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December 26th, 2008

Banks Receiving Mixed Signals From Regulators

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Banks across the country are saying they’re stuck between a rock and hard place, as their regulators are sending them mixed signals. Being strongly encouraged to expand consumer lending, while informally being pushed to raise and hold extra capital has banks confused — further complicating the restoration o our financial system.

Federal Reserve Vice Chairman Donald L. Kohn addressed the “The Role of Regulators” earlier in December, when he spelled out both the increased actions by the Federal government designed to encourage lending, as well as the need for financial institutions to hold reserve capital.

In addition to capital infusions, expanded guarantees on deposits, and reducing the cost of borrowing, “The Federal Reserve and the other federal banking agencies have also issued regulatory guidance to promote greater lending by banks.”

“Additional capital, liquidity backstops, and regulatory encouragement should all reinforce financial stability and set the stage for increased bank lending:”

For example, banks generally are required to hold 6% of their assets as so-called “Tier 1″ capital and 10% of assets as “core” capital. But federal examiners recently have been informally boosting those thresholds, according to bankers and other industry experts.

In addition, the Office of the Comptroller of Currency (OCC) has begun to classify more loans as “troubled”, forcing financial institutions to hold additional capital to prevent against the risk of default.

Consumers should continue to suffer as banks have yet to have any specific lending requirements. Lawmakers are pushing to change that:

Frustrated lawmakers have threatened to withhold the remaining $350 billion of unallocated TARP funds until there is proof that banks are using the capital for new loans. Democrats want to legally require banks to lend at least some of the money.

The banks have responded that federal capital requirements have hampered their ability to lend more aggressively. Without the possibility of formal repercussions from consumers, banks will be forced to listen to their regulators, no matter how confusing they are.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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