An Easy Target?

With everyone wanting and urging increased lending, why isn’t it happening?



The average consumer likely gives little to no consideration to examiners. However, they have curiously become the center of a storm of criticism, highlighted recently in this article from the March 29th USA Today.

This passage from the article is particularly telling:

Bank executives say examiners are downgrading the ratings of performing loans simply because the collateral – typically, commercial real estate – has fallen in value or the borrower is located in an economically distressed state. And they’re making banks exceed the minimum levels for capital and bad-loan reserves. Those practices, they say, fail to consider banks’ familiarity with their communities and borrowers.

It is scenarios such as these that have lead President Obama to comment on a separate occasion, “In some ways, the pendulum may have swung too far in the direction of not lending after a decade in which it had gone way too far in the direction of getting money out the door.”

Bank executives, particularly those hailing from smaller community banks, have become significantly more outspoken regarding the strictness of examiners. From legislators, the critique of examiner performance has been more pointed. Rep. Blaine Luetkemeyer (R-Mo) at a joint hearing told a panel of regulators, “Quite frankly, you guys are part of the problem.”

I believe this is the rather lengthy joint hearing to which the article was referring, although I have been unable to locate the specific quote. In the linked hearing, there were three panels, with the second panel comprised of regulators, and the third comprised of lenders (banks and credit unions). Rep. Spencer Bachus – half comically, half seriously – noted at the start of the third panel that they regulators had all left the room prior to the testimonies of the institutions they regulate.

What makes regulators and examiners a very convenient target (separate from the legitimacy of the claims against them, which must be evaluated on a case-by-case basis), is that they do not rely on public opinion to do their jobs – certainly not to the same extent that banks and legislators do. The incentive mismatch may lead to a seriously lopsided PR battle between the two camps.

It is also worth noting that the NCUA has seemed to dodged the majority of this back and forth. The Agency is not mentioned in the USA Today article (the article explicitly targets bank examiners) and was not summoned to the joint hearing. Further, it is not included in any proposals to consolidate financial regulators. What ultimately will be the impact of the NCUA’s relative disengagement from these discussions?