Feds, lawmakers wrangle over fund

WASHINGTON — U.S. regulators fended off complaints Friday 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. 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.

Martin Gruenberg, the No. 2 official of the Federal Deposit Insurance Corp., disputed accusations that the agency has discouraged banks from extending loans.

The FDIC gives banks "considerable flexibility," Gruenberg said. "We do not instruct banks to curtail prudently managed lending activities."

Federal Reserve Gov. Elizabeth Duke said the central bank and other financial regulators have called on banks to meet the needs of creditworthy borrowers.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the nearly 10 percent unemployment that has ravaged the country and preoccupied Congress.

Rep. Barney Frank, D-Mass., head of the House Financial Services Committee, urged the administration to work on legislation with Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee.

Congress must approve the small-business fund proposed by the administration, which would be open to banks with $10 billion or less in assets.

Velazquez and other lawmakers want the $30 billion from the bailout program sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

Velazquez said, "Taking $30 billion and simply handing it to banks — in the hopes that they will make loans — is not sound policy."

Karen Mills, the head of the Small Business Administration, said the agency lacks the trained personnel and infrastructure to handle such a massive loan program directly.

Banks "can get the money to businesses quickly," Herbert Allison, the assistant Treasury secretary for financial stability, testified. But Duke, the Fed governor, said banks aren't willing to take the risk to lend and the money should go instead to the SBA.

Rep. Spencer Bachus of Alabama, the Financial Services panel's senior Republican, questioned injecting billions more into a federal agency.

What is keeping banks from lending to businesses, he said, are the strictures that bank regulators are imposing.

"We hear this every day" from community bankers, Bachus said.

Stephen Andrews, president and CEO of Bank of Alameda in California, told the lawmakers: "The reality is they're making it very tough for community banks to lend."