November 13th, 2008 11:36 AM by Lehel Szucs
The government’s program of using taxpayer funds to bolster banks’ capital was supposed to be "passive" -- meaning, Uncle Sam wasn’t going to take an active role in managing the businesses.
But a joint statement today from the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. on bank lending hardly sounds passive.
In the statement -- titled, "Meeting the Needs of Creditworthy Borrowers" -- regulators’ frustration with still-frozen credit markets is evident. And they’re now essentially demanding that banks boost lending.
Tony Crescenzi, bond market strategist at Miller, Tabak & Co., calls the statement "a strong-arm tactic that ostensibly takes advantage of the power that the government now has over banks and other financial institutions."
The memo doesn’t "request" action -- it "expects" action.
Key points in the statement:
--- "The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers."
Although regulators of course nod to the idea of lending responsibly, they warn that "if underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well as the long-term interests and profitability of individual banking organizations."
--- "The agencies expect banking organizations to work with existing borrowers to avoid preventable foreclosures, which can be costly to both the organizations and to the communities they serve, and to mitigate other potential mortgage-related losses."
--- "The agencies expect banking organizations to regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organization and sound lending and risk management practices."
--- And a final point that won’t give any comfort to bank shareholders fearful of more government intervention: Regulators warned that banks "should not maintain a level of cash dividends that is inconsistent with the organization’s capital position, that could weaken the organization’s overall financial health, or that could impair its ability to meet the needs of creditworthy borrowers.
"Supervisors will continue to review the dividend policies of individual banking organizations and will take action when dividend policies are found to be inconsistent with sound capital and lending policies."