The Bush Administration has finally found something it can do about the recession. The gaping budget deficit rules out tax cuts or spending increases. But a new Treasury Dept. package of regulatory and accounting changes designed to get banks to step up their lending might actually give the economy a modest boost.
The Administration's worry is banks' reluctance to lend even to good corporate customers. Top officials blame the credit crunch for helping to bring on and prolong the recession. "We currently see the credit crunch as the most critical issue confronting monetary policy," Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee on Feb. 20.
WRONG MESSAGE? Deputy Treasury Secretary John E. Robson has taken charge of the bank-prodding effort. The package, still taking shape, will be designed to polish up bank balance sheets, help the industry attract new investors, and make lending more profitable for hard-hit banks. "The message has got to get out that we want bankers to make loans to good credits," says Robson.
Officials in Washington have been saying that for months. But bankers say they get a different message from regulators still shaken by the thrift industry meltdown. Examiners have been forcing banks to write down huge commercial real estate loans, which clobbers bank earnings and impairs their capital.
The Treasury would try to reverse that trend. Examiners would be encouraged to appraise real property based on its cash flow rather than its value in a severely depressed market. Regulators are also likely to propose giving banks more time to reduce the share of real estate loans in their portfolios.
Perhaps the most novel of the Treasury's ideas is "loan splitting." Under current rules, a bank must declare a loan nonperforming if the collateral's value slips below a specified percentage of the loan value. In today's soft real estate markets, regulators have enforced these rules tightly, forcing banks to reclassify loans even when borrowers are up-to-date on payments. That has driven up banks' reported levels of nonperforming assets, making balance sheets look shaky and forcing higher loss reserves.
Under loan splitting, banks could resurrect many of those loans. If the value of mortgaged property falls, the bank could write off just part of the note and restore the remainder to performing status. Similarly, if a hard-pressed borrower can meet only part of its debt service, the bank could write off just the portion of the loan that's not being paid. The remainder would become a good loan, without the complexities of a full-blown debt restructuring. Salomon Brothers Inc. bank analysts calculate that one-third of the $33.4 billion in nonperforming assets at the 35 largest banks could qualify for loan splitting. That could boost those banks' 1991 earnings by 8%.
Critics fret that the new rule could promote "inconsistent accounting not just between banks, but within each bank," says Dayton Lierley, a visiting fellow at the Financial Accounting Standards Board. Congress' watchdog arm, the General Accounting Office, will soon issue a report charging that banks and regulators aren't tough enough in downgrading loans.
Loan splitting, however, could make banks more willing to recognize problem debts, since it would eliminate today's all-or-nothing system of classification. Analysts tend to agree with Robson's argument that the plan will help "make regulation reflect reality." Says Edward E. Furash of Furash & Co.: "Banks now have a lot of stuff in nonperforming that you know they can recover."
DELAYED ACTION. Whether such accounting changes will actually induce banks to make more loans is another matter. "The linkage isn't all that clear," admits a senior Fed official. Fortunately, the central bank is seeing evidence that investor confidence in banks is improving. Bank stocks have risen sharply during Wall Street's war rally. And rates on bank certificates of deposit, after lagging for months, are beginning to reflect the Fed's rate-cutting moves. The lower cost of funds is encouraging banks to open the spigots a bit, Fed officials say. Hours after Greenspan's Senate testimony, Bank of America cut its prime rate to 8 3/4%, from 9%.
So, while Greenspan pledges "unrelenting effort" to bust the credit crunch, senior officials say the Fed is delaying decisions on such radical measures as boosting loans to banks through its discount window. Money-supply statistics will show if lending has increased, a Fed governor says, "in weeks, not months."
In the meantime, Treasury's package could help the process along, giving banks a psychological boost. In this recession--caused, in large part, by the withering of confidence among both lenders and borrowers--such small steps may well be the safest weapons the government can employ.
A PLAN TO EASE UP ON BANKS
The Treasury Dept. is considering a number of rule changes that could make bank financial statements look better:
LOAN SPLITTING New accounting treatment would let banks reclassify loans that are meeting part of their payments. A bank could write off the nonperforming portions and put the rest back on the books as earning assets
LBO LOANS Changes would allow banks to take many loans out of the category of "highly leveraged transactions" or HLTs. That would lessen bank stockholders' fears about LBO exposure
REGULATORY CLIMATE Regulators would instruct examiners to back off from recent loan-classification and write-off standards that bankers have blamed for chilling lending