Much Too Little, Way Too Late

Six months ago, knowledgeable observers were moaning about unreasonably arbitrary and harsh examinations of community banks by examiners who seemed eager to choke off bank credit at a time when it was desperately needed. Last week, Congressional leaders finally caught on to the problem.

Democratic representatives Barney Frank and Walt Minnick of the House Financial Services Committee sent a letter to the federal bank regulators that complained about "over-zealous regulatory actions" not based "on wrong-doing by community banks, but on changes in the economic environment and toughening regulatory standards."

While I question how much good such public pressure will do, it's at least some comfort that community bankers are getting across to some people with political power the fact that, as Barney Frank asserts, the regulatory gaps and other regulatory shortcomings that contributed to the current economic crisis "were largely within the non-bank lending market and Wall Street banks." It's frustrating when people who ought to know better hear the word "bank" and apply it with a broad brush. There are "banks" and, then, there are "banks."

The "few examples" listed by Frank and Winnick are representative of what we've been seeing. If this type of jawboning, together with the flexibility that the federal regulators are trying to give banks in dealing with problem real estate assets as represented by last Friday's "Guidance on Prudent Commercial Real Estate Loan Workouts" curbs some of the more arbitrary overkill by federal bank examiners, so much the better for community banks. They need all the help they can get at this point. Nevertheless, to a large extent this is Nero fiddling while Rome burns.

The real problem is that commercial real estate values are distressed, and, as we've been babbling about for awhile, and as Wilbur Ross again warned on Friday, those values are likely to get much, much worse. Parsing the nuances about arbitrary CAMELS ratings, troubled debt restructuring, and sources of bank funding are going to be the least of the problems that we'll have to deal with if we're in the beginning of "a huge crash of commercial real estate."

Wilbur Ross thinks another 400 to 500 banks might fail; Chris Whalen thinks maybe as many as 1,000 might bite the dust. Most of these failed banks will be community banks, the "too small to save" banks, as they have been thus far. Is the country ready to see a large portion of an industry that Frank and Winnick state "fills an important need" (lending to the small businesses that drive the economy) fail because a steamroller started by the Too Big To Fail and the unregulated lenders rolls over them? If so, lots of luck with priming the economic pump through bank lending. You think it's tough now for small businesses to get a loan? Watch what happens when the community banking industry's cut by 15% to 20% or more.

If the country's not ready to accept that result, then something creative ought to be proposed and debated. Where are our feckless leaders in leading us by talking about these tough issues, no matter how politically unpopular they might be? They're too busy issuing overly optimistic pablum on the Sunday morning talking head shows, like the recovery's going to be "a little choppy" and banks need to "take a chance again on the American economy."

Regulatory relief is nice, but it's not enough. Not by a long shot.