Banks that are being scolded by the government for not lending are blaming a new obstacle: The government itself.
Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.
Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?
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"We want to lend, but the regulators are flat-out telling us, 'Get your capital up.' Then there's Congress telling you to lend it all out," said Greg Melvin, a board member at FNB Corp., a Hermitage, Penn.-based bank that got $100 million in bailout money.
"Two arms of the government are saying exactly the opposite thing — it's ridiculous," added Melvin, who is also chief investment officer at investment firm C.S. McKee.
Regulators say they are only being careful, and they deny slowing lending.
"We don't believe that prudence and increased lending are mutually exclusive — they go hand in hand," said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.
The tit-for-tat marks the latest problem for the government's financial bailout, known as the Troubled Asset Relief Program, or TARP.
The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.
Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.
But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks' loan applications and flagging those considered too risky.
It's unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that both healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.
The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending — sometimes even to creditworthy borrowers.
Four government regulators oversee the country's roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.
Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.
But the credit crisis has made it harder for banks to raise private capital. And the government doesn't want to give bailout money to banks that might later fail.
The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.
Chief executive Babette Heimbuch said her bank wanted to keep lending but had a "difference of opinion" with the OTS over what its cumulative losses were and how quickly it will see them.
"They basically told us to stop lending," she said.
While the Treasury wants banks to lend, "the regulators have a whole different mindset: They want to protect the insurance funds," Heimbuch said, referring to money that regulators use to insure bank deposits.
Regulators see things differently.
William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.
"We want our institutions to lend, but we want them to lend in a safe and sound way," Ruberry said. "We think creditworthy borrowers shouldn't have a hard time finding loans."
But banking professionals say it's inevitable that tougher capital requirements for banks will reduce lending.
"There's just no doubt," said Stephen Wilson, CEO of LCNB National Bank in Lebanon, Ohio, which got $13.4 million in government capital. "If regulators tighten lending standards," fewer loans will be made.
Some of the banks' biggest critics reject that argument.
"I'm skeptical," Democratic Rep. Barney Frank of Massachusettes, chairman of the House Financial Services Committee, told The Associated Press in an interview. "If you're a bank that has TARP money, then you have more capital and you should be able to lend."
Frank said the Obama administration would push for more lending by banks that get bailout money. But others fear such efforts could backfire by forcing banks to lower lending standards.
"We're trying to get out of a credit problem, so the last thing you want is for banks to go out and make more bad loans," said Bert Ely, a longtime banking analyst in Alexandria, Va.
William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J., said regulators have forced his bank to set aside more capital in case their loans go bad — "even though we don't have any problems."
"We argued like crazy, but they're just being very cautious," Dunkelberg said.
Could the Obama administration and Congress simply tell regulators to lighten up on the banks?
Eugene Ludwig, a former comptroller of the currency, has advocated a "capital holiday" that would temporarily let banks draw down their capital and unclog lending.
But that plan carries risks, too. With less money on their books, banks will have a smaller cushion to protect themselves against losses. They would be at greater danger of failing if the economy worsened.
In the meantime, banks are adjusting to life with regulators constantly looking over their shoulder.
At First Federal Bank of California, Heimbuch said business is running as normal — albeit with no lending. She said her bank is trying to attract more capital. But she conceded there were no guarantees.
"You never know when a regulator is going to say enough is enough," she said.