PUSHBACK BANKING

Last week the WSJ ran a story, "Rules Stifle Lending To Risky Borrowers," about federal regulators clamping down on banks that make leveraged loans to companies deeply in debt.

As you might expect these loans are money makers for banks, so the restraints didn't go down easily with bankers. Here's a few paragraphs from that story.

Banks also objected because their primary role in leveraged loans is as middlemen who arrange a loan and sell it in pieces to outside investors. The banks bear less risk if the borrower defaults than if they held on to the loans.

Leveraged loans generate hefty profits for banks such as Credit Suisse Group AG and J.P. Morgan Chase & Co. Borrowers include Wendy’s International Inc., SeaWorld Entertainment Inc. and PetSmart Inc.

Most of us try to avoid middle men because they take a slice of the pie. Here you have the banks apparently wanting to take advantage of both worlds, booking hefty profits but getting to unload the responsibilities before the fat lady sings.

Here's a few paragraphs from the other side.
While leveraged loans didn’t cause the financial crisis, their post crisis boom alarmed regulators who saw an eerie parallel to the mortgage bonds that battered investors world-wide during the foreclosure epidemic.

“Our banks are completely tied to the broader financial system in some form or fashion, so if there is weakness in one part of the system, it is likely going to have negative consequences for the banks,” says Darrin Benhart, the Office of the Comptroller of the Currency’s deputy comptroller for supervision risk management.

In response, the Fed, OCC and Federal Deposit Insurance Corp.strong-armed U.S. banks for the first time ever to comply with minimum underwriting standards on leveraged loans no matter who shoulders the credit risk.

The heightened scrutiny has included monthly reviews of individual banks’ leveraged loan portfolios. Regulators also have lowered the boom on some lenders in so-called private letters, for which failure to comply can lead to fines or curbs on lending, dividends and other activities.  

 From the regulator side it's about sustaining financial stability, but that comes with severe concerns, one of which is how much should bureaucrats interfere with open markets. There are others like over-regulatory zeal to rule out any and all risks. After all, one of the inherent fundamentals of markets is risk.

But like any water-filled balloon, push on it one place and it will bulge in another. And that's just what these lenders are confirming as they take their business elsewhere to firms not regulated by the Fed and other government overseers.

Now some might call that normal human behavior, albeit many don't believe bankers inherently fall into that category: Push on me here and I will push back somewhere else. It could turn into a huge stalemate, otherwise known in more crude circles as a pissing contest. And we all know how good stalemates are for the economy.