Filed at 5:58 p.m. EDT
By The Associated Press
NEW YORK (AP) -- The president of the New York Federal Reserve said Wednesday
that big banks have overreacted to crumbling world financial markets by becoming
too conservative in their lending.
Echoing warnings last week by Federal Reserve Chairman Alan Greenspan, William
J. McDonough said ''there are beginning to be some notions that the largest
banks in the U.S. are restraining credit.''
As recently as last summer, federal banking regulators were saying exactly the
opposite, that banks had been too loose in their lending practices.
But a recent ''massive swing'' in the other direction has been ''excessive'' and
not warranted by market conditions, McDonough said.
He said that for now, the main effect of the credit crunch has been sharply
higher interest rates paid by large companies wishing to raise money by selling
bonds. Community and regional banks, which do the bulk of lending to small and
medium-sized businesses that fuels job growth, have not backed away from making
loans, he said.
Banks still have plenty of money to lend, and McDonough said he does not expect
the tighter credit to persist for long. But if it did, it could choke off
corporate investment and put a drag on economic growth, even causing a
recession.
McDonough made the comments at a press conference announcing new proposed
guidelines by worldwide banking regulators for handling risky loans. The
guidelines were issued by the Basel Committee on Banking Supervision of the
Swiss-based Bank for International Settlements.
Despite new reluctance of the biggest U.S. banks to take much lending risk,
banks still need guidance on how to evaluate the risk in each loan they make,
how to account for it on their books, how to run ''stress tests'' to see how it
might perform under adverse economic conditions, and how much to disclose to
regulators and the public about the risk of its portfolio.
Even in Western countries, where banking supervision is relatively aggressive,
bank disclosure is far from uniform, said Nick LePan, a deputy banking
superintendent for Canada and author of the proposal.
The guidelines are intended to standardize lending, accounting and reporting
practices worldwide, but especially in smaller countries, LePan said.
Both men said the guidelines had been in development for two years and were not
a reaction to the rout in world markets, which began last summer after economic
problems in Asia deepened and Russia sharply devalued its currency.
They were also not a reaction to the near failure and bank rescue of Long-Term
Capital Management, a risky hedge fund, last month. Early this week another
troubled hedge fund, Ellington Capital Management, began selling hundreds of
millions of dollars in securities in a bid to meet margin calls from lenders.
On Wednesday, BankAmerica took a $372 million writedown on a loan to an unnamed
trading and investment firm, which sources close to the bank said was D.E. Shaw,
another high-risk investment firm.
Hedge funds, which are largely unregulated, make sophisticated financial bets
with money from wealthy investors, often using high-powered computer models to
speculate on sometimes minute differences in interest rates among securities.
Bank holding companies, but not banks themselves, are allowed to take equity
positions in the funds.
McDonough said he believes more trouble lurks in bank portfolios from hedge
funds, but nothing ''even close to comparable in size'' to Long-Term Capital
Management, which required a $3.6 billion bailout by a group of investment firms
including four New York City banks.
McDonough also said he does not envision that the Federal Reserve system will
have to serve as the lender of last resort to any hedge funds or banks that have
invested in hedge funds. |
