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Greenspan Warns Bankers Not to
Take Economy for Granted

By Marcy Gordon   Associated Press
WASHINGTON — 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 in Washington.

"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 sustainable level.

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.

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