Mixed Messages to Banks

Before I start, let me just say that I do not believe you can blame the mortgage crisis on the CRA.  It was probably a small contributing factor, but so was almost everything.

Still, this does not bode well for promises of an exciting new era of regulatory competence which will keep banks from taking too many risks:

The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.

"We're paranoid about credit quality," he told the Boston Business Journal.

That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn't even need to set aside in money in 2008 for anticipated loan losses.

But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.

The problem, according to FDIC data, was that from late 2003 through mid-2008, East Bridgewater Savings made an average of 28 cents in loans for every dollar in deposit -- a sharp contrast to the 90 percent average loan-to-deposit ratio among similar banks, the paper reported.

"There are no apparent financial or legal impediments that would limit the bank's ability to help meet the credit needs of its assessment area," the FDIC wrote in the CRA evaluation.

The agency also faulted the bank, which does not have a Web site, for not promoting its loan products enough, the Journal reported.

The problem with urging banks to make safer loans is that making safer loans means, to a first approximation, not making unsecured loans to poorer people, or the self-employed.  They are the people who are the least likely to have a steady income when the time comes to repay the money.  Robbing the poor and entrepreneurial of access to capital is only politically popular in hindsight, never when you're actually doing it.

I mean, his bank seems overconservative even by the soberest standards--indeed, the low loan-to-deposit ratio kind of makes me wonder if the bank is really supposed to make profits as a standalone bank, or if it isn't connected with some other organization for which it functions as a loss-leader.  But hey, as long as they're not asking me for money, I don't really see why this is my worry.

I expect we're going to see a lot of this over the next five years, as Congress starts to feel more like the owners of the banking system:  "Make more loans!  But also, raise credit quality!  Serve the poor and minorities!  But not ones who are going to default!"  It almost makes me feel sorry for them.