Obama: Will work to cut ‘red tape’ for small bankers

Meeting with 12 executives representing small banks, President Barack Obama vowed Tuesday to press federal agencies to “cut some of the regulatory red tape” that may be limiting the ability of community bankers to lend more as the economy recovers.

“Some small bankers still have some regulatory constraints,” Obama explained in remarks made in conjunction with the meeting. “In some ways, the pendulum may have swung too much in the direction of not lending after decades of too much of a focus on getting money out the door.”

Obama, who sat down with top executives of the largest U.S. banks in a heavily publicized event last week, met with the small and community bank executives at the White House to press the group to increase lending to small businesses and to discuss the foreclosure crisis in housing as well as the importance of passing bank regulatory reform.

“There are businesses that are looking for loans that are profitable, and the key is to match them up with healthy lenders,” the president said.

Small bankers discussed concerns that bank examiners are pressuring them to hike their capital, effectively restricting their ability to lend more at the same time that small businesses are cutting back on their borrowing, said Chris Cole, regulatory counsel at the Independent Community Bankers of America.

Cole said the group also is discussing concerns the small banks have with what they consider to be overly restrictive limitations on access to bailout funds under the government’s Troubled Asset Relief Program, or TARP.

“TARP is requiring small banks pay too high dividends to the government,” Cole said.

“They are arguing that small banks need more access to the TARP program and that the terms are not attractive enough,” he said of the group that met with Obama on Tuesday.

Experts now predict that as many as 1,000 small banks may fail before the economy fully recovers, and community bankers have intensified their efforts to have the Obama administration launch a program that would direct more TARP funds to troubled institutions.

Will pleas go unheeded?

So far this year, 139 small banks have failed, according to the Federal Deposit Insurance Corp., which has 552 institutions on its list of troubled banks.

Jaret Seiberg, analyst at Concept Capital in Washington, argues that even though community banks are a powerful lobby in Washington, the meeting isn’t expected to result in major policy changes.

“Community banks have enormous political clout, and this meeting is intended to make up for the fact that they were not invited to last week’s White House confab,” Seiberg wrote.

Lobby groups for small banks are seeking to have the Treasury Department develop a program to provide TARP funds to those banks on the cusp of a default. Under the plan, the aid from the government would be equal to the amount the banks could raise in the private markets.

For example, a small bank could be eligible for $10 million in TARP funds from a so-called “matching program” if it could show a commitment of $10 million from private investors.

Eight bankers from the ICBA met with Obama, including James McPhee, president of Kalamazoo County State Bank in Schoolcraft, Mich., as well as Mark Schroeder, CEO of German American Bancorp in Jasper, Ind. McPhee is the group’s chairman-elect.

Community bankers would like to see Obama set up a meeting with White House staff as well as leaders from bank regulators including the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC, according to Cole.

“This way, the different groups can discuss their concerns and identify possible solutions,” he said.

A major area of concern for commercial bankers is what they consider to be an overly tough examination environment for small banks, which is having the effect of limiting their incentive to lend more.

Bank regulators have issued guidance that seeks to have small banks limit their commercial real estate loans to less than 300 percent of the capital the banks have on hand. It’s Cole’s view that bank regulators have a “one-size-fits-all” mentality and that the 300 percent cap on commercial real estate loans doesn’t fit all banks.

“There is no question that commercial real estate is an area we are going to see further losses in,” he said. “But examiners have to be cognizent that not every bank is weak because of an over-concentration in commercial real estate.

“This and the whole examination process is making banks cut back on their lending.”

The House of Representatives approved sweeping bank regulatory reform on Dec. 11, but community banks successfully lobbied to have the chamber narrowly reject a controversial provision ? backed by the White House ? that would have allowed bankruptcy judges to modify mortgages for troubled homeowners.

“Most small bankers are supportive of the idea of regulatory reform,” Obama said. “They want to make sure that as we regulate better, we have to make sure we are not loading them with more burdens.”

(c) 2009, MarketWatch.com Inc. Source: McClatchy-Tribune Information Services.