NEW YORK - William McDonough, president of the Federal Reserve Bank of New York, is worried that banks are on the road to weaker loan underwriting standards.
Mr. McDonough, in an interview Thursday night, said banks are lowering loan prices to win more business. Price concessions, he said, have historically been followed by a deterioration of credit quality standards.
"The history of banking is that if you have competition on pricing, it is usually followed by competition on credit quality," Mr. McDonough said. "Has the industry learned that maintaining credit standards, maintaining pricing standards, is appropriate?"
Danger of Repeating Mistakes
The New York Fed chief first waved this red flag last Monday at a closed-door meeting at the Federal Reserve Board in Washington. It was a gathering sponsored by the Group of 30, a collection of bankers who operate in international markets, academics, and former regulators.
Mr. McDonough, who took over the New York Fed in July, said Thursday that he is issuing a warning to banks that they ought not repeat the lending mistakes of the past.
Thomas G. Labrecque, chairman and chief executive at Chase Manhattan Corp., said some of his competitors are making loans on terms that Chase would not offer.
"There will always be pressure at a time of very little loan demand to do that," he said at a press conference in Washington Tuesday. "We have seen people drop a few covenants that we wouldn't or do things for margin that we wouldn't.
"But I don't see that as a major trend at the moment."
Tribute to William Taylor
Mr. McDonough hosted the first annual William Taylor memorial dinner Thursday at the New York Fed. Mr. Taylor worked at the Fed for 20 years, before becoming chairman of the Federal Deposit Insurance Corp. in 1991. He died unexpectedly in August 1992.
E. Gerald Corrigan, former president of the New York Fed, was the featured speaker.
"A growing and now large fraction of the income and earnings of many major banks is attributable to trading and other nonintermediary activities," Mr. Corrigan said. "There is an obvious question as to the stability and sustainability of at least some of those sources of income and profit over time."
He described the condition of some big banks in late 1990 and 1991 as "outright scary."
While a "meltdown" of the nation's financial system was avoided, Mr. Corrigan warned bankers to watch out for any rapidly growing asset, such as real estate, and concentrations of credit. And he said capital ratios can be deceiving.
Mr. Corrigan said Congress must reform bank law. Noting that lawmakers tend to avoid reform until it's too late, Mr. Corrigan said: "If Congress waits for the crisis, it may well get it, but it ain't going to like it."
Deposit insurance should be overhauled to include private co-insurance, Mr. Corrigan said. He cautioned against resorting to "gimmicks" like narrow banks or uninsured banks.
