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To: 2MAR$ who wrote (119)	6/20/2001 3:04:41 PM
From: 2MAR$	Respond to of 208838

DJ OFF-THE-RUN: Greenspan Spreading Credit If Crunch Comes By Steven Vames Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Greenspan to banks: Save the economy by continuing to lend, but save yourselves by not lending to the increasing number of deadbeats out there. In other words, be generous but be selective. That's a tall order, but it's essentially the message that the Federal Reserve chairman Alan Greenspan gave in his testimony Thursday on the condition of the banking industry. Though the chairman took great pains to avoid suggesting that there's any sort of looming disaster for the banking industry, he essentially put the burden of avoiding a credit crunch - a situation which could make or break the economy at this point - on the backs of banks. While he couched his remarks with testaments to the still-healthy capitalization and profitability of banks, he also suggested that if a credit crunch pulls the economy apart at the seams, it's not all the Fed's fault. After all, the Fed has cut rates like mad so far this year. But a seizing of the capital markets at this time in the business cycle - rate cuts or not - would be a disaster, and banks have historically been the catalysts for such events. The Fed knows of what it speaks. It was, after all, widely credited with having successfully steered the world through a particularly severe credit and liquidity crunch in 1998, and it must have liked the kudos it received for that performance. But the Fed also wants to avoid being seen as a fall guy if the economy worsens or fails to respond as vigorously to its stimulus as many thought. So it's understandable that Greenspan wants to get the message out that banks have to do their part. Investors have definitely done their part. This year, the corporate bond market broke all kinds of records, issuing loads of debt into the credit markets while at the same time enjoying an acute narrowing in credit spreads. Additionally, as pointed out by Greenspan, investors have helped lessen bank's burden by willingly buying some of the riskier syndicated credits that banks can't keep on their books. But banks still have loads of problematic loans on their books stemming from the mid-1990's laxness in lending standards. The 1998 financial crisis taught banks a lesson for the years following and that has stemmed the proliferation of bad loans. But the risks still remain. "With a weakening economy, problems could well worsen for some banks and some market segments, requiring vigilance by banks and their regulators," said Greenspan in his prepared remarks. "As always, the underlying issue is how to adopt and price realistic assessments of likely credit risks under alternative scenarios, keeping credit flowing to worthy borrowers at reasonable prices," he added. On its own, that statement sounds like solid advice for any given set of banks anywhere. But a deeper look might suggest that Greenspan is somehow trying to pass the torch to banks after running the first leg of the economic race. The Fed's super-sharp 2.5 percentage points worth of rate cuts put inter-bank rates clearly in the economically stimulative zone. Banks - largely in the business of borrowing short-term money and lending long-term - now have the burden of using what the Fed has given them. Unless, of course, they get overly worried that the financial health of their borrowers will prevent them from getting paid back. Given that bank loan quality has demonstrably deteriorated, it's no secret that lending standards have tightened. But there is no sign yet that things are threatening to seize. Greenspan wants to make sure it stays that way. -Steven Vames; Dow Jones Newswires; 201-938-2206