Federal Reserve Chairman Alan Greenspan today
cautioned bankers to avoid making loans on the expectation that the
vibrant economy will continue unabated, since a downturn could
bring defaults by borrowers.
In a speech to a community bankers' group, Greenspan said there
is a "troubling trend" of many banks taking the strong economy
for granted and considering it "ordinary and expected."
"Lending granted on that basis could have grave consequences
for the (banking) industry's ability to weather weaker economic
conditions," Greenspan said in a text of his speech to the
Independent Community Bankers of America at its meeting in San
Antonio. Copies of the speech were released by the Federal Reserve
"We have seen growing evidence of credit granted solely on the
expectation that current robust (economic) conditions will continue
indefinitely, with little thought as to how borrowers might perform
under more stressful conditions," Greenspan said.
His remarks came two days after he publicly expressed concern
that the nation's record-breaking economic expansion could be ended
by a resurgence of inflation unless growth slowed to a more
Private economists viewed Greenspan's comments Monday as a clear
signal that the central bank, which has already boosted interest
rates four times since June, is prepared to do more.
The Fed has pushed the federal funds rate, the interest that
banks charge each other, up a full percentage point to 5.75
percent. That in turn has lifted commercial banks' prime lending
rate, the benchmark for millions of business and consumer loans, by
a full percentage point to 8.75 percent, its highest level in
nearly five years.
In his speech today, Greenspan noted that despite the strong
economy, lax lending standards and fraud at some banks recently
have brought big losses to the federal deposit insurance fund.
The Federal Deposit Insurance Corp., hit by its largest losses
from bank failures since the early 1990s, last month told its
examiners to keep alert for warning signs of possible fraud at the
banks they inspect. Fraud is said to have been a major factor in
three recent bank collapses, two of which cost the FDIC's insurance
fund an estimated $982 million.
There were eight U.S. bank failures last year.
The FDIC, which has predicted that as many as 20 banks could go
under this year, also has proposed that capital requirements be
doubled for banks that specialize in risky loans to people with
inferior credit histories.
Greenspan said bankers and examiners "need to be continuously
vigilant about traditional causes of bank failure such as fraud ...
and rapid entry into new and unfamiliar activities."
"History has shown that entry into new business lines without
the experience, tools and controls to do the job right most often
leads to losses and sometimes, failure," he said.