What’ll it take to get banks lending again?

When throwing billions of dollars their way didn’t work, President Barack Obama tried publicly chastising executives.

Still, no dice.

Obama may be working at cross purposes with his own administration.

A regulatory crackdown makes it harder for community banks—those most likely to extend credit to local small businesses—to lend.

Which means it’s a promising yet perilous time for local financial institutions.

Anger at Wall Street has led some people to move their money to local credit unions or community banks. A “bring the billions home” bill by state Rep. Brian Egolf, D-Santa Fe, would institutionalize that sentiment by giving the state’s business to New Mexico-based banks.

If Egolf’s bill becomes law, Los Alamos National Bank would be one of a few banks qualified to manage the state’s $1.4 billion operating account, now handled by Bank of America. But where the state may giveth, the feds taketh away.

On Feb. 1, LANB announced it had struck an “agreement” with its regulator, the Office of the Comptroller of the Currency, requiring that the bank devise a plan for raising capital and cutting back on commercial real estate loans. The deal also requires that the OCC sign off before the bank can pay any dividends or hire any new senior lending officers.

The OCC also wants LANB to cut back on lending to customers with “lower” credit scores or heavy debts (which could include, say, student loans or outstanding hospital bills).

A call to the OCC regional offices was directed to a spokesperson in Washington, DC, who did not return a message. LANB Chairman and CEO Bill Enloe describes the deal’s terms as “very standard” and mostly “precautionary,” based on a somewhat cookie-cutter regulatory approach to acceptable risk.

SFR reviewed LANB’s most recent quarterly report, a 69-page spreadsheet filed with regulators on Feb. 9, and found nothing to contradict Enloe’s characterization.

Jerry C Walker, president of the Independent Community Bankers Association of New Mexico, tells SFR that federal regulators “started trying to justify their existence” after getting caught flat-footed by the 2007 credit crisis.

“Maybe I know you and I know you’re good for the money. I might make you a loan based on your character. Regulators aren’t interested in allowing character loans,” Walker says. “The regulators are applying the same standards to local bankers who know their customers as to the mega-banks where they use credit scores and it’s a big lending factory.”

Enloe is more cautious in his criticism. “They’re not encouraging institutions to lend more money from a regulatory standpoint,” Enloe says. “The regulators would say, ‘That’s not our problem. Our problem is to make sure that banks are healthy and make good loans.’ They’re right—that is their job.”

But the effect of the current crackdown is to limit access to credit—which could prolong the recession.

“They don’t talk about good loans or bad loans; they just talk about ratios. Making a good loan should be the goal—not percentages,” Enloe says.

LANB’s balance sheet is in far better shape than Charter Bank, which regulators shut down earlier this year.

In that case, the Federal Deposit Insurance Corporation spent $202 million in selling Charter’s assets to a Texas company that does not plan to make the same kinds of consumer and business loans that Charter did.

A 2003 study by the FDIC and the Justice Department Civil Rights Division found that bank mergers led to “lower small business loan growth.”

Localism, however, is not a federal priority.