Federal regulators pressured to ease credit crunch; local bankers like idea, but doubt it will spur economy.

Bush administration efforts to spur lending by easing federal regulations on banks are being greeted warmly by local bankers and banking analysts, but many doubt they will have the desired effect and stimulate the economy.

The administration, worried that a sluggish economy could thwart President Bush's 1992 re-election effort, has been pressuring federal regulators for the past several months to ease up on banks and savings and loans institutions.

Less than a month ago, Treasury Secretary Nicholas Brady ordered all senior bank examiners to Washington where he personally told them to ease up on real estate credit of banks and S&Ls.

In addition, on Nov. 7 federal bank regulators issued uniform guidelines as to how bank examiners should treat real estate loans. The new policy statement stresses that bank examiners shouldn't automatically require bankers to write down real estate loans and establish reserves against them, noted Sal Serrantino, president of bank consulting firm California Research Corp. of Santa Monica.

Instead the guidelines urge banks and examiners to look at a broad range of factors, including long-term economic growth prospects and borrowers' business records in evaluating the credit situation.

"This is a significant policy statement," Serrantino said. "I think we will look back in three or four years and see this as a pivotal element to make credit more available."

An executive of the California Bankers Association said, however, that the message has not been received by California banks.

"We've heard from regulators in Washington that their officers shouldn't overreact -- we have yet to see that in the field," said Janet Lamkin, chief advocate, federal government relations, of the association. "The decisions as of late have been more harsh and . . . have forced banks to limit their lending."

An example, she said, is the persistence of "non-performing performing" loan evaluations by federal regulators. Such loans are ones where a borrower is paying off the interest or principle of the loan but where the loan is still classified as non-performing because of questions regarding the underlying collateral and the borrower's future ability to repay the loan.

Many local bankers, however, say the problem is not so much one of loan supply as loan demand. A crisis of consumer confidence has reduced demand for loans and created a situation of too many bankers chasing after too few good risks.

"People just aren't buying," said Joseph Walling, chairman and chief executive officer of Santa Monica Bank. "Loan demand is down. People are insecure about staying on the job."

Another banking official said that regulatory easing may join the Federal Reserve Board-engineered decrease in interest rates as futile efforts to encourage lending.

Despite that, some surveys seem to suggest a credit crunch is real. A survey released Nov. 13 by the Western Independent Bankers Association and the Washington-based Secura Group, a bank consulting group, found that 47 percent of chief executives at Southern California banks said they were rejecting loan applications even from credit-worthy borrowers. Last year only 29 percent of bankers said that was the case.

In the survey, 47 percent of the bankers complained that examiners make new policy during an exam, and 63 percent said they had no way to appeal decisions within the regulatory framework.

Most affected locally has been real estate lending. Overall, it has slowed to a crawl in Los Angeles County as a result of over-building and general economic slowing. While bankers may cite high vacancy rates that have caused the slowdown in commercial construction and thus commercial real estate lending, building industry officials complain the same broad brush is being applied to residential construction and real estate lending -- for which substantial demand still exists.

The Bush administration is also changing the dictatorial role of regulators vis-a-vis bankers with regard to determining and accounting for credit problems. A new regulation requires examiners to justify decisions to downgrade real estate loans and allows bankers to appeal decisions made by federal agency examiners.