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To: 2MAR$ who wrote (156)	6/20/2001 3:55:08 PM
From: 2MAR$	Read Replies (1) \| Respond to of 208838

Greenspan warns US banks on loans, lending (Edits, adds details, paragraphs 1, 3, 4, 11-13) By Andrew Clark WASHINGTON, June 20 (Reuters) - Federal Reserve Chairman Alan Greenspan said on Wednesday the U.S. banking system remained strong despite signs that loan quality was eroding amid a soft economy, and warned bankers against tightening lending standards too far. "Many of the traditional quantitative and qualitative indicators suggest that bank asset quality is deteriorating and that supervisors therefore need to be more sensitive to problems at individual banks, both currently and in the months ahead," Greenspan told a Senate Banking Committee hearing. "We are fortunate that our banking system entered this period of weak economic performance in a strong position," he said, adding borrowers in the retail, manufacturing, health care and telecommunications industries had been especially affected by the slowdown. But Greenspan also cautioned bankers against overreacting to the growing number of loans whose repayment may be in question, noting that as existing loans begin to go bad, there can be a tendency to substantially tighten lending standards for new loans in a way that could choke off credit. "Such policies are demonstrably not in the best interests of banks' shareholders or the economy," he said. "They lead to an unnecessary degree of cyclical volatility in earnings ... More importantly, such policies contribute to increased economic instability." In a report accompanying Greenspan's testimony, however, the Fed said banks seemed to be striking a reasonable balance. "At present the tightening of terms and standards at banks ... has not inhibited the flow of funding to sound borrowers," it said. "So far banks seem to be making balanced decisions on the trade-off between risk and returns." CAUTIOUS OPTIMISM Greenspan's message of cautious optimism was echoed by other top U.S. bank regulators testifying at the hearing. "We believe the condition of the banking industry is strong," Comptroller of the Currency John Hawke said. "We are however in a period of heightened uncertainty concerning the domestic and global economic outlook." "If the U.S. slowdown becomes deeper and persists, the effects on the banking industry will be much more serious," he added. "Declining earnings would heighten concerns about the safety and soundness of certain banks." While most of those concerns have so far focused on banks' business-lending activities, the Fed report also noted the potential for problems in other sectors, particularly consumer credit and commercial real estate. Rapid growth in U.S. household debt in recent years has pushed consumers' debt service burdens to new highs, "making their ability to perform under stressful circumstances less reliable," the Fed said. And in the real estate market -- where U.S. office space vacancies increased over the first quarter in the worst performance for the industry in 20 years -- "emerging signs of weakness make the need for vigilance more pressing," it said. On the other hand, Greenspan said large banks especially had made major progress at developing systems for recognizing, pricing and managing loan risks. That should help them make better loans in future that will be less volatile when economic conditions fluctuate, he said. "This is a sea change -- or at least the beginning of one," he said. "Formal risk management systems are designed to reduce the potential for the unintended acceptance of risk and hence should reduce the pro-cyclical behavior that has characterized banking history. But, again, the process has just begun." ((Washington newsroom, phone: 898-8315, fax: 898-8383, email: washington.bureau.newsroom@reuters.com)) REUTERS * end of story *