After putting in place a number of government measures to stabilize the financial markets, a joint statement from the agencies involved has called on lenders to get back to business and make loans to creditworthy borrowers. The statement yesterday also indicated that the federal government, which is now a big investor in many banks, will not overpay on the dividend side when they should be making loans. And there’s a note of caution that the feds are not going to look kindly on overpaying CEOs.
As Treasury Secretary Henry Paulson was announcing revisions to the government’s $700 billion bailout plan to focus more on ways to get auto loans and other consumer credit flowing again, four government agencies issued a joint statement that called on lenders to work with mortgage borrowers on restructuring and to make loans to businesses and consumers who are creditworthy.
“Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole,” said the joint statement from the Federal Reserve Board of Governors, FDIC, Office of the Comptroller of the Currency and the Office of Thrift Supervision. “It is essential that banking organizations provide credit in a manner consistent with prudent lending practices and continue to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers’ repayment capacities. However, if underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well as the long-term interests and profitability of individual banking organizations,” they added.
While noting the necessity of maintaining a strong capital position, the four agencies also said that banks need to recognize losses on bad loans in a timely manner and maintain adequate loan loss provisions. The statement pointedly warned banking organizations against paying excessive dividends to shareholders which might undermine their financial stability.
And then there was the tough talk on overpaying CEOs and other top executives. “Poorly-designed management compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” the foursome warned. “The agencies expect banking organizations to regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organization and sound lending and risk management practices,” they said.
RBR/TVBR observation: We’ll be waiting to hear whether the funding spigot opens and broadcast deals are again getting done. As for the lending institutions, when you take a government bailout you can expect to also take on tighter government regulation. We don’t have a problem with that. We’re taxpayers too and we want some value returned from all of the taxpayer cash that is being pumped into the nation’s financial system. Ditto that if the government also bails out the auto industry.