Bankers express skepticism about Clinton's ability to free up credit.

Two months after President Clinton's decree to end the credit crunch plaguing small businesses, local bankers said they don't expect a dramatic change until laws are changed.

"It's laudable that the president is trying to do something about the regulatory burden, but would I say it's going to work? Not very soon," said Jim Staes, president and chief executive of Home Bank in Signal Hill, summing up the sentiments of a number of bankers surveyed by the Business Journal.

Staes said Clinton is doing the things he should try to do, but it is up to Congress to make the necessary changes.

One of the main reasons bankers are so skeptical about Clinton's decree is that the president only has the power to change administrative orders, meaning regulations added by regulators to enact the law. The president doesn't have the power to change a statute.

Further fueling bankers' skepticism is that, when President Bush made a similar effort to give bankers regulatory relief, not only did that not happen, but Congress enacted the Federal Deposit Insurance Corp. Improvement Act of 1991, a 500-page bill that added upwards of 150 regulations to an industry already governed by 500 regulations.

Clinton unveiled his four-part plan to ease the credit crunch before an audience of bankers and small business officials gathered at the White House March 10.

Since then, only one part of the program, which has to do with documenting business loans, has been announced in detail. But even that part was not met with much enthusiasm among local bankers, mainly because most banks in Southern California are ineligible to qualify.

According to the policy statement on documentation, banks are allowed to issue a "basket of loans," equivalent to 20 percent of total capital, with only minimal documentation requirements.

But to qualify for issuing these streamlined loans, banks must receive a grade of either one or two on a five-point scale federal regulators have devised to determine an institution's health.

Banks are graded on five criteria, and then an overall rating is derived from each of those five tests. The overall rating is known as a Camel rating, the acronym for the five tests: "C" for capital, "A" for asset quality, "M" for management, "E" for earnings and "L" for liquidity.

Although these grades are not allowed to be disclosed, a board member for the California Bankers Association pointed out that 74 percent of the banks in the state have some sort of regulatory action against them. Therefore, most wouldn't be able to receive the one or two rating required to qualify for the minimal-documentation loans.

Asset quality and earnings are the areas that hurt banks the most in Southern California, said bankers.

Even if many Southland banks could qualify, bankers pointed out, the amount of loans exempt from lengthy documentation is small compared to the bank's overall loan portfolio.

For Home Bank, which has $40 million in capital, this decree would allow the bank to exempt $8 million of its loans from documentation. But the bank makes $250 million worth of loans, Staes said.

Other parts of Clinton's four-part plan would:

* Allow banks to accept real estate as collateral without always requiring a certified appraisal, which can often be costly. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, appraisals are required for any loans exceeding $100,000 and secured by real estate.

Clinton has talked about raising this limit to $250,000 and has said that just because a business loan is backed by real estate, it doesn't mean an appraisal is required.

What Clinton doesn't have the power to do, however, is to change the requirement that appraisals be conducted every year on most properties that are securing loans of more than $100,000.

* Prevent some small-business loans from being lumped together with more-risky loans when an examiner is reviewing a bank's loan portfolio.

Bankers said they feel restrained from approving certain small-business loans because they are nervous about getting a bad evaluation on their loan portfolio.

* Encourage banks to consider the "reputation and good character" of potential borrowers rather than relying on strict financial judgments.

Larry Hartwig, president and CEO of Southern California Bank in Downey, said regulators have been applying increased pressure on bankers to supply a detailed financial statement every quarter, audited by a certified public accountant. Some loan customers, however, especially family-owned businesses, don't have the sophisticated financial reporting systems that regulators are calling for, Hartwig pointed out.

Before regulators start easing up, bankers said, the field examiners will need a directive from the FDIC, and that is not expected for another two to three months, said Hartwig.

The four federal regulators of banks and thrifts include the FDIC, the Office of the Comptroller of the Currency, the board of governors of the Federal Reserve System and the Office of Thrift Supervision.

Already, Eugene Ludwig, the new comptroller of the currency, issued a memorandum to 3,300 bank examiners to ease "overly restrictive" regulation.

He said that, although tough regulations were needed to stem the earlier wave of bank failures, "credit availability, particularly to small and medium-sized business, is one of the critical elements of a strong economic recovery."

Details on the other three parts of Clinton's four-part plan are currently being formulated.