Government seeks ways to spur lending

Treasury Secretary Henry M. Paulson tried to leave no doubts last week about how he expected America's banks to use the $250 billion the government is handing out as capital.

No hoarding.

"The needs of our economy require" that the banks "deploy" the money, he said -- as loans to businesses, individuals, and, perhaps most importantly, other banks.

These were strong words, chosen perhaps to obscure how limited the government's legal authority is to require banks to do anything specific with their money.

But the words also served notice that the government intended to extract at least an implicit guarantee that it will get the maximum bang for its bucks. That means bringing a moribund bank lending market back to life.

"You'll see some gentle prodding, coupled with different forms of moral suasion," said Chris Nichols, chief executive of Banc Investment Group, which provides lending and other services to community banks.

No one expects the Treasury to go as far as British authorities, who are mandating specific lending levels for banks that have been the subject of a government rescue plan there.

U.S. law generally avoids using compulsion to govern bank lending practices. The exceptions are anti-discrimination laws such as the Community Reinvestment Act of 1977, which encourages banks to invest in their own communities and prohibits redlining neighborhoods, but still mandates that loans be "consistent with safe and sound operation" of the lending institutions.

Treasury officials may not need the majesty of the law to bend banks to their will, industry experts say. A hint of their clout came last week, when Paulson muscled nine major banks into accepting injections of up to $25 billion from the $700-billion rescue plan approved by Congress last month, overcoming resistance from several institutions. Paulson's goal was to use the big institutions' acquiescence to eliminate the stigma that direct assistance from the government might otherwise carry.

Then there's the power of the purse.

Banks seeking the money will have to apply through the agency that regulates them (the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision or the Federal Reserve). It will be up to the Treasury Department to decide which applicants get the money, and how much.