U.S. to Push Banks to Step Up Lending

Lawmakers including Sen. Charles E. Schumer have said financial firms should not use government aid to acquire healthy banks or pay shareholder dividends.
Lawmakers including Sen. Charles E. Schumer have said financial firms should not use government aid to acquire healthy banks or pay shareholder dividends. (Jb Reed - Bloomberg News)
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By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, November 11, 2008

U.S. officials are finalizing guidelines for financial firms to encourage those that receive federal rescue money to lend more and curb executive compensation, government sources familiar with the matter said yesterday.

The Treasury Department plans to spend $250 billion to buy stakes in financial firms as part of its mammoth $700 billion financial rescue program. Lawmakers, however, have complained that institutions that have accepted the government investments have been spending excessive amounts to reward their shareholders and top officers instead of increasing lending.

In drafting guidance for financial firms, federal banking agencies have wrestled over how to goad them into lending without compelling them to make bad loans. The Federal Deposit Insurance Corp. wants stronger language that would pressure institutions to lend, while other regulators have argued that that could expose the banks to more losses, the sources said on condition of anonymity because the document has not been released publicly.

The disagreement at one point threatened the effort. But multiple sources said that there is now broad agreement among the four federal agencies that regulate banks, and that guidance could be released this week.

"Any suggestion that the guidance will tell banks not to lend to creditworthy customers is not correct," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency.

Two other banking regulators, the Office of Thrift Supervision and the Federal Reserve, as well as the Treasury Department, are also involved in the discussions, the sources said.

While not as strong as a law, federal guidance is a powerful tool for U.S. financial regulators. Banks that ignore guidance can face a range of sanctions. At the same time, regulators have considerable flexibility to waive or modify the guidance for individual institutions.

The guidance being drafted by regulators would apply to all financial firms, not just the ones receiving government help.

Some details are still being worked out, but the primary goal of the guidance document is to increase lending, which has seized up as a result of the financial crisis in recent months. Experts believe the economy will not begin to recover until the loan markets are working again. Yet, by increasing their lending, banks could expose themselves to more losses. In the economic downturn, people most eager to borrow increasingly are considered the most risky.

The guidance is also expected to address bank spending on dividends and executive compensation.

"These loans must not be used to acquire healthy banks, hoard in their coffers, or pay shareholder dividends," Sens. Charles E. Schumer (D-N.Y.) and Robert Menendez (D-N.J.) wrote in a letter to Treasury Secretary Henry M. Paulson Jr. last week.

Yet several sources familiar with the document said the final language may address a limited range of executive compensation practices rather than impose broad limits.

The Treasury Department has said it wants some banks to use the money to buy troubled rivals. For example, the government refused to invest directly in National City, whose acquisition last month instead was made possible by giving money to PNC Financial Services Group. That has raised concerns that other banks will use the money for acquisitions, which economists generally regard as having little positive impact on the economy.

The Bush administration has defended the use of the rescue money to pay dividends to shareholders. The Washington Post reported that banks may pay shareholders more than half the amount they receive from the government over the next three years, basically passing on money that might otherwise support new lending. White House officials say that giving money to shareholders also is important for the economy.

Industry groups have criticized efforts to impose restrictions on banks that accept government investments, arguing that many of these firms are healthy and yet are being pressure to participate in the rescue program for the sake of the economy.

The American Bankers Association, the largest industry trade group, has said Treasury officials should either make the program voluntary or eliminate restrictions.


© 2008 The Washington Post Company

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