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04 March 2008

CNN: US Senate banking committee chair blasts regulators for not sounding warning about risky lending practices




Lawmakers grilled bank regulators Tuesday about why they didn't intervene as lax lending standards led to a meltdown in the mortgage market and a credit crunch that threaten the economy.

 

Appearing before the Senate Banking Committee, federal and state banking officials are expected to testify about their oversight of bank's risky loan practices and their current efforts to address the mortgage crisis.

 

The witness list includes Federal Reserve Vice Chairman Donald Kohn, Federal Deposit Insurance Corp. Chairwoman Sheila Bair, Comptroller of the Currency John Dugan, Office of Thrift Supervision Director John Reich, National Credit Union Administration Chairwoman JoAnn Johnson and Iowa's Superintendent of Banking Thomas Gronstal.

 

"Again and again the question has been asked over the past year as our credit markets have grown increasingly impaired: Where were the regulators?," said Christopher Dodd, D-Conn., chairman of the banking committee, in his opening statement. "Why didn't they do more? Were they asleep at the switch? And when the alarm went off, did they merely hit the snooze button?"

 

Regulators sought to assure senators that the current troubles will not topple the banking industry.

 

"Despite these strains, the banking system remains fundamentally sound, in part because it entered this period of stress in such strong condition," Dugan said.

 

After years of lax underwriting standards, the financial industry has been under siege as homeowners increasingly fall behind in their mortgage payments. These defaults and foreclosures have sent tremors through the credit markets, chilling lending in many sectors including commercial real estate and municipal bonds. It's become increasingly difficult for people to obtain credit ranging from mortgages to student loans to credit cards.

 

The crisis has forced Wall Street banks to writedown more than $130 billion in assets and to get capital infusions of more than $100 billion. More of both are expected.

 

The turmoil has hit banks of all sizes. The Federal Deposit Insurance Corp., the federal agency that backs bank deposits, last week reported the biggest jump in "problem institutions" it has seen since the savings and loan crisis of the late 1980s. While the extent of the problem is still low by historic standards, it identified 76 banks as in trouble - a 52% increase from a year ago.

 

However, in her written testimony today, Bair said that the industry is in much better shape than it was two decades ago. For instance, there are fewer problem assets on their books than it was in 1991, the height of the S&L crisis.

 

"The vast majority of institutions remain well-capitalized, which will help them withstand the difficult challenges in 2008 until broader economic conditions improve," Bair said.



© CNN


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