A belated tip of the hat to Rep. Spencer Bachus, chairman of the House Financial Services Committee, for speaking up on behalf of the US community bank sector as an engine for small business growth.

On January 13, Rep. Bachus spoke at a forum on small business lending issues organized by the Federal Deposit Insurance Corporation (FDIC). You can learn more about the forum here and read the text of Bachus’ remarks here.

Bachus’ brief opening remarks included some useful and timely criticism of the red tape that is choking the ability of community banks to lend to small businesses:

“We all know that inadequate underwriting and loose credit standards contributed to the financial crisis, but the pendulum has swung too far towards regulatory micromanagement [of community banks]. We can't allow arbitrarily applied regulatory directives to stifle prudent lending. Six regulatory agencies, led by our host, the FDIC, issued joint guidance telling their examiners to stop second-guessing banks' loans. The guidance said, ‘prudent’ small business lending will not be subject to supervisory criticism.’

“Sadly, this guidance is not always filtering back to the operational level as indicated by the constant stream of comments I receive from community banks and their small business customers. The guidance is being offset by examiners and other regulators in the field who have not followed the policies promulgated by their agencies in Washington, but have continued to be overly restrictive when evaluating the credit decisions of those they regulate. This has become so commonplace that it has become known as the ‘mixed messages’ problem.

“Instead of focusing on patterns and practices that suggest poor underwriting or lax risk management, some examiners are micromanaging the daily activities at our community banks. All of us in Washington, both in Congress and at the agencies represented at this forum, must continue to examine the mixed messages being sent to community banks, which continue to create uncertainty and impede recovery.”

You don’t need to read too closely between the lines here to get Bachus’ message – he is watching the small business lending and community bank files closely. Perhaps he will make these issues the focus of future House Financial Services Committee hearings, to raise their profile.

Bachus should try to bring Federal Reserve Chairman Ben Bernanke to a hearing, to press him further on his statement during the FDIC forum that “we should do everything we can to minimize regulatory burden on the smaller banks, which don't pose any kind of systemic risk,” versus those too-big-to-fail Wall Street banks.

Senator Mark Warner (D-Virginia) picked up on the “mixed messages” theme in his remarks to the forum. Warner echoed Bachus when he pointed to the confusing signals that bank regulators send to financial institutions by encouraging them to lend to small businesses, but then issuing heavy-handed directives “from the top” that have the effect of discouraging those institutions from making such loans.

Warner (who deserves a tip of the hat as well) addressed one additional “mixed message” problem. He reminded the audience that the real goal of the US financial system cannot only be to enable feats of “financial engineering” that create little more than “paper value.” Rather, the financial system must be focused on creating economically useful and longer-lasting forms of capital.

If I understood Senator Warner's statements correctly, then he worries about how at present the US financial system rewards “financial engineers” more than “real engineers,” even though the “real engineers” make the more important contribution to national prosperity.

That’s another economic “mixed message” that Rep. Bachus' committee should study.