It's a common Beltway tactic. If you don't like a policy, tell everyone it's going to harm a vocal and disadvantaged group, forcing the policy's advocates on the defensive.
Federal Deposit Insurance Corporation
, the regulator that underwrites bank deposits and works to promote the safety of the financial system, appears to be on the receiving end of that play.
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The FDIC recently proposed rules that would force banks to hold more capital in reserve against subprime loans, which are riskier than other loans. Such rules would crimp the profitability of subprime lending and hurt margins at banks that do a lot of it.
The FDIC's plans, which are being circulated among other Washington bank regulators for comment, were leaked to the press last month, appearing first in a Jan. 25 article in
The Wall Street Journal
. In the
story and subsequent press reports elsewhere, industry sources are cited as saying that the FDIC's capital proposals could reduce bank lending to lower-income borrowers, since it is generally assumed such people carry a greater credit risk.
In addition, they argue the FDIC's plans go against the
Community Reinvestment Act
, which compels banks, in the words of the FDIC, "to help meet the credit needs of their entire community, including low- and moderate-income neighborhoods."
But CRA lending has deliberately been made exempt from the FDIC's capital rules on subprime lending, according to a person familiar with the body's proposals, which
has not seen and the FDIC declines to share.
This person thinks lenders who are against the rules could be spreading scares about their impact on CRA lending in an attempt to frustrate the FDIC's proposals. Asked whether this is the case, David Barr, a spokesman for the FDIC, says: "There are always people pursuing their own agenda, so it wouldn't surprise me." Barr added that "it is the FDIC's intention that any proposal would be neutral in terms of CRA."
If the FDIC manages to persuade Washington bodies that the CRA is safe, the passage of its rules may be swifter. Ditto their impact on bank margins. After the proposals go to the FDIC board, they are then submitted for public comment. Barr declined to give a time frame for the plans' progress.
Banks' level of compliance with the CRA is regularly rated by the FDIC, which looks at how much lending gets done in low-income communities. Much CRA lending is government-guaranteed and almost certainly wouldn't require higher capital reserves under the FDIC's rules. Not so CRA lending that takes the form of nonguaranteed subprime loans.
Karen Shaw Petrou, president of
, a Washington-based financial-services consultant, is opposed to the FDIC's proposals because she thinks they'll lead banks to increase the amount of guaranteed credits at the expense of nonguaranteed lending. The result could shut low-income people out of nonguaranteed products like credit cards.
How so? While the FDIC proposals do attempt to make CRA loans exempt from higher capital, the agency has defined CRA loans only as those with government guarantees, according to Shaw Petrou, who says she's seen the plans. As a result, the banks would do more guaranteed than nonguaranteed lending to pass their CRA quota, she reasons. Barr declined to give the FDIC's definition of CRA lending in the subprime proposals. And neither Barr nor Shaw Petrou could say what proportion of CRA lending is guaranteed.
Big financial institutions, especially those that don't do much subprime, probably support the FDIC rules, since the collapse recently of two banks that did a lot of subprime lending did nothing for the image of the industry in Congress. The FDIC has had to cough up around $1 billion to cover the failures of Boulder, Colo.-based
and West Virginia-based
First National Bank of Keystone
Only poorly run banks with large subprime loan books are likely to be hurt by the FDIC rules. Barr points out that unregulated finance companies are pressured by the market and ratings agencies to hold much more capital against subprime loans than regulated banks. As a result, tougher capital rules "should not put
regulated banks at a disadvantage."