Oregon Banks in Our Economy

            One of the many repercussions of our current economic crisis has been a lack of credit for the private sector, further slowing the growth of economy. It is important, however, to isolate and understand the source of this solvency problem. In today’s deluge of news headlines on the financial crisis, the discussion of the financial institutions involved in the turmoil has failed to distinguish between the institutions that caused the mess that we are in and the institutions that can help us solve it. News reports that have blamed “banks” for the credit crunch that we are experiencing are misleading; there is a very big difference between the institutions that are at the root of the problem–such as AIG, Bear Stearns, Merrill Lynch, and Lehman Brothers, which are not banks& ndash;and traditional banks that are FDIC-insured as depository institutions. Wall Street and Main Street banking are very different, and the failure to distinguish between the two undermines confidence of the traditional banking industry. It should be remembered that it is the weakness of Wall Street banking, the non-bank lenders and securitization markets that is driving the stories about the lack of credit.

            Traditional depository institutions, such as the community banks that we have here in Oregon, make small business and personal loans and should be considered a trusted repository for Oregonians’ hard earned savings. Unlike the Wall Street financial institutions that are dominating headlines, these banks are a part of their communities and serve as the primary source of capital for local investments. Oregon banks are and were subject to rigorous oversight by not only state, but federal regulators as well, and very few made subprime mortgage loans. Moreover, they employ approximately 20,000 Oregonians. Contrary to current perceptions, the traditional community banking sector has actually experienced an increase in lending during this recession. According to the Federal Reserve, in the last year business loans expanded by 11 percent, consumer loans expanded by 9 percent, and overall business lending by banks expanded by 12 percent, indicating that community banks can be a part of the solution to our financial crisis if they are included. With this in mind, the policy considerations affecting Oregon’s banks are crucial to the successful restoration of our economy.

            On Tuesday, two of Oregon’s House legislators proposed a bill that would levy a 100 percent tax on executive bonuses paid by Oregon banks that receive assistance from the U.S. Treasury's Troubled Asset Relief Program (TARP). The motivation for such a bill is the $165 million in executive bonuses that AIG has been paying out of federal bailout money. A complement to this bill, which has not yet been assigned a number, is HB 2784, which would create a state oversight board to review the activities of institutions that receive federal money. These proposals are inappropriate for our state and will result in very little increase in revenue as only three Oregon-based banks received TARP money. Of those three only two awarded bonuses which were relatively small and predominantly in stock and non-equity incentive compensation. The proposal of these bills illustrates the misperception and mismanaged regulation of Oregon’s banking industry. It associates Oregon’s banking industry with Wall Street institutions when our healthy community banks practiced responsible fiscal policy by steering clear of the financial instruments that led to the insolvency of institutions like AIG. That is not to say, however, that the Federal government is misguided in its consideration of a 90 percent tax on recipients of bonuses from AIG and other such institutions. The argument that bonuses and compensation for management makes financial institutions more competitive is shallow and does not address the root of the matter; the management decisions to invest with complicated financial instruments, formulate subprime loans, and engage in other highly leveraged financial activities are a contributing factor to the economic turmoil we find ourselves in today.

            In an attempt to promote policy appropriate for Oregon’s investment in small business industry, my office has introduced SB 890 to establish a small loan guarantee program. This bill directs the Economic and Community Development Department to develop a program that guarantees loans or other forms of credit to small businesses for operational capital. Our economy is being confronted with otherwise stable small businesses that are struggling for capital, shedding jobs, and consequently some are failing because credit for operation loans is unavailable. This bill provides a solution in that it creates a temporary state loan guarantee program to help free up bank held capital for access by small businesses for short term o perating loans. This proposal is only one of many possible solutions to our economic problems; others are needed to encourage the relationship between Oregon’s small businesses and their community banks. Most importantly, the first step towards any solution is for Oregonians to have confidence and trust in their local banks. It is also critical for legislators here in Salem to make informed and sound policy decisions that support the ability of our banks to provide services that contribute to the creation of jobs and the investment that will encourage the economic recovery of our state.

Reminder: Town Hall Tomorrow

            Tomorrow morning, Saturday, March 20, I will be attending a joint Town Hall with Representative Bill Garrard and Representative George Gilman. It will be held from 10am–12pm at the Klamath Basin Senior Citizen Center, located at 2045 Arthur St., Klamath, OR 97603. Please feel encouraged to attend, ask questions, and discuss issues directly with your elected officials.

            Please remember, if you don't stand up for rural Oregon, no one will!

Best regards,

Doug