U.S. regulators to urge banks to lend more

SAN FRANCISCO (Reuters) - U.S. banking regulators plan to release an interagency statement in the next few days encouraging well-capitalized banks to keep lending to credit-worthy borrowers, the director of the Office of Thrift Supervision said.

"There is a concern that healthy institutions are sitting idle and not responding to the needs of credit-worthy borrowers," OTS Director John Reich told Reuters in an interview on Monday.

Lawmakers have recently been pushing for the U.S. Treasury Department to insist that banks receiving federal capital use the funds for lending.

Rep. Barney Frank, the chairman of the House Financial Services Committee, has said Congress may object to releasing the final $350 billion of the $700 billion market rescue plan if participating banks are not increasing their lending activities.

Reich said the interagency statement also will stress the need for banks to work with borrowers to avoid foreclosures and will encourage banks to maintain "strong levels of capital."

He said it also will ask banks to make sure their dividend policies do not interfere with their ability to lend.

The statement will be from the OTS, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency, and the Federal Reserve.

Regarding the U.S. Treasury Department's $250 billion capital injection program for banks, Reich said more than 120 thrifts have applied and about 10 have had their applications approved.

The OTS, a unit within the Treasury, regulates about 800 savings and loan institutions that are largely focused on mortgage lending.

Reich said the thrifts with pending applications are in various stages of processing.

For thrifts that are uncertain about whether to participate in the program, Reich said they should put in an application by the November 14 deadline just in case. But he said he understands if well-capitalized banks are reluctant to sign on.

"It's understandable if they don't want to have to worry about the strings attached," he said.

The program comes with restrictions on executive pay and dividend payouts. Some lawmakers are seeking additional conditions on the lending practices of participating banks.

Reich said the thrift industry as a whole is under significant pressure, especially because federal law requires thrifts to concentrate their lending on consumers and small businesses, preventing them from diversifying in the tough economic environment.

He said 70 percent of thrifts are operating profitably and that, in aggregate, the capital situation is "pretty good" for the industry.

"Institutions are looking for more capital, but investors that are normally interested in investing are sitting on the sidelines... waiting to invest until the market bottoms out," Reich said.

He said third-quarter earnings for the thrift industry, which the OTS expects to release on November 20, are "not likely to look very good." Declining housing prices, rising unemployment, and a lack of consumer confidence continue to plague the industry, he said.

"We're probably going to see a few more failures," Reich said.

Two of the largest institutions regulated by the agency -- IndyMac Bank in California and Washington Mutual -- have failed since July. IndyMac is now operated by the Federal Deposit Insurance Corp and WaMu was acquired by JPMorgan Chase & Co (JPM.N).

Reich said more institutions will be added to the OTS's problem thrift list, which stood at 17 at the end of the second quarter. There were 12 troubled thrifts at the end of the first quarter.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn and Carol Bishopric)