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The Honolulu Advertiser
Posted on: Saturday, February 27, 2010

Officials defend bank lending rules

By Marcy Gordon
Associated Press

WASHINGTON U.S. regulators fended off complaints yesterday from lawmakers and small business owners that overly strict rules for banks have prevented crucial credit from flowing to where it is needed most.

U.S. bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008. And some lawmakers are laying the blame on the policies of federal regulators.

At stake at a House hearing was a $30 billion small-business lending fund for banks proposed by President Obama. Criticism echoed that while big Wall Street banks got multibillion-dollar bailouts, community banks that played no role in stoking the financial crisis have been subjected to overly strict directives that are squeezing credit for local businesses.

Martin Gruenberg, the No. 2 official of the Federal Deposit Insurance Corp., disputed accusations that the agency has discouraged banks from extending loans to small businesses and for commercial real estate, saying the FDIC gives banks "considerable flexibility" in decisions to extend loans.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the nation's nearly 10 percent unemployment.