BY REDUCING the reserves that banks are required to keep on hand, the Federal Reserve Board has helped borrowers a little -- but only a little. The Federal Reserve, as the most influential of the bank regulators, is threading its way carefully through a sharpening dilemma.
This country is painfully emerging from a decade in which credit was easy -- so easy and careless that too many loans defaulted and too many banks failed. The S&L disaster, with its immense costs to the taxpayers, shows what lies at the end of that road. With the federal examiners looking over their shoulders, the banks have been tightening their standards. That has brought the inevitable wave of complaints from borrowers that their credit is being cut off. Politicians, in the White House as well as in Congress, have been leaning on the regulators to go easy and show some concern for businesses that need loans.
The Federal Reserve's decision to ease the reserve requirements is a response. It's a useful gesture, telling borrowers (and their friends in Washington) that their appeals have been heard. But it doesn't involve enough money to make any great difference in actual lending practices. Nor does it make any difference in the soundness of the banking system.
The basic guarantee of a bank's soundness is its capital -- the stockholders' money that is the cushion to absorb losses. The costs of the S&L cleanup are falling on taxpayers, because the regulators, under great pressure from both the Reagan administration and Congress, allowed S&Ls to operate with no capital at all. For the banks, new and refined capital requirements are going into effect at the end of this month and will be further tightened during the next two years. The relaxation of the reserve rules will do nothing to undercut that. By making the banks a little more profitable, it is likely to leave them stronger than before -- and that's important.
Some borrowers object that the banks are overreacting and aggravating the recession by their new-found caution. But 156 banks have failed so far this year. While that's down a little from last year's record, it's an extremely high number and stands as clear evidence that lending standards in the past were too slack. It's impossible to tighten them without causing some distress among borrowers. But that's part of the price of the long credit-fed boom of the 1980s. It was fun for a while, but then the country began to realize that it was much too dangerous to let it continue.