OPEN FORUM On Banking

Mixed Signals Stifle Economic Recovery

By Steven K. Buster



It’s been fashionable to bash banks and bankers for the past two years. It started on Wall Street, but now all banks, big and small, are being blamed — if not for risky loans and bets on derivatives — for refusing to make credit available to pull the nation out of the worst recession since the 1930s.

We need to end the blame game and start working together to fix the situation. President Obama seems to have had the same inspiration. He sat down with representatives of the community banking industry on Dec. 22 to discuss their role in recovery. Bankers who attended said he seemed to be listening — something that’s difficult to achieve in the polarized Washington environment. Here’s what I hope he heard:

More TARP money for community banks isn’t the answer. After seeing the public outrage at banks that took the bailout funds the first time, only desperate banks would participate in such a program.

The banking problem isn’t a lack of capital. It’s a lack of confidence and trust in lenders and borrowers, the key ingredients that make our financial system work. The more that Washington and the media indiscriminately bash all bankers, the more difficult it becomes to restore trust.

Banks are willing to lend, but loan applications from qualified borrowers have all but dried up. Potential borrowers are sitting on the sidelines because they lack the confidence to take on debt in these uncertain times. Try telling this to Congress, however, and the response is our underwriting standards are too strict. So first we’re criticized for making bad loans; then we’re criticized for not making them!

Everyone agrees some policy changes are needed but we probably don’t need more rules — just better ones. While Washington is telling us to lend, lend, lend, regulators are combing through our loans and insisting that we value loans based on the depressed market, not the values on which the loans were made. This redefines good loans — ones made on sound underwriting principles to borrowers who have never missed a payment — as “bad loans,” and forces us to pressure already struggling borrowers, including some of our best customers, into providing additional collateral. As long as regulators continue these policies, they will slow the recovery. Bank regulators have gained new insights from this crisis that will make them a lot more effective in the future. Politicians should step back and trust them to do their jobs.

The situation is a bit like hitching a donkey to a cart, locking down the brakes, and then flogging it mercilessly. That donkey isn’t going anywhere until the brakes are released.

When confidence in traditional banking is restored through cooperation, not confrontation, we can help finance the recovery without being coerced or bribed by Washington. Now that the crisis is over, it’s time to step back and let traditional bankers do what they do best — and what is in everybody’s best interest. It’s time to let bankers get back to business by extending the credit necessary to fuel a recovery.

I hope that’s what the president heard.

This guest editorial appeared on December 30, 2009 in the San Francisco Chronicle.