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FDIC official disputes claims regulations hamper lending

By Marcy Gordon
Associated Press / February 27, 2010

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WASHINGTON - US regulators fended off complaints yesterday from lawmakers and small business owners that overly strict rules for banks have prevented crucial credit from flowing to where it is needed most.

US bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008. And some lawmakers are laying the blame on the policies of federal regulators.

At stake at a House hearing was a $30 billion small business lending fund for banks proposed by President Obama. Criticism echoed that while big Wall Street banks got multibillion-dollar bailouts, community banks that played no role in stoking the financial crisis have been subjected to overly strict directives that are squeezing credit for local businesses.

Martin Gruenberg, the number two official of the Federal Deposit Insurance Corp., disputed accusations that the agency has discouraged banks from extending loans to small business and for commercial real estate.

The FDIC gives banks “considerable flexibility’’ in decisions to extend loans, Gruenberg said. “We do not instruct banks to curtail prudently managed lending activities.’’

Federal Reserve governor Elizabeth Duke said the central bank and other financial regulators have called on banks to meet the needs of creditworthy borrowers.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the nearly 10 percent unemployment that has ravaged the country and preoccupied Congress. A House committee chairman urged the Obama administration to work with lawmakers seeking to send federal bailout money directly to small businesses rather than through banks.

Representative Barney Frank, a Massachusetts Democrat, and head of the House Financial Services Committee urged the administration to work on legislation with Representative Nydia Velazquez, Democrat of New York, who heads the Small Business Committee.

Velazquez and other lawmakers want the $30 billion from the bailout program sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

Velazquez said a more direct approach is needed to get credit where it is needed. “That does not mean doing more for financial institutions and expecting the benefits to trickle through to small firms,’’ Velazquez said. “Taking $30 billion and simply handing it to banks - in the hopes that they will make loans - is not sound policy.’’

Karen Mills, the head of the SBA, said the agency lacks the trained personnel and infrastructure to handle such a massive loan program directly.

Banks “can get the money to businesses quickly,’’ Allison testified. But Duke said banks aren’t willing to take the risk to lend and the money should go instead to the SBA.