WASHINGTON - The credit crunch shows faint signs of easing after over two years, but the banking system remains mired in rules that are discouraging much-needed lending that would revive the economy, Federal Reserve Board chairman Alan Greenspan was scheduled to say in a speech last night.
"Fortunately, the credit crunch, which has been so debilitating to the economic performance in this country over the past two to three years, has shown no evidence of worsening in recent months and may finally be retreating," Greenspan was expected to say in his speech before the Tax Foundation. An advance text of his remarks was released by Fed officials.
"At least this is the implication of some stirring in the loan markets in recent weeks," the text of the speech says. The Fed recently reported that commercial and industrial loans by banks in September increased to $596.6 billion from $2.5 billion, the first rise in 11 months.
But, Greenspan added, "elements will remain to restrain economic growth if we do not remove unnecessary regulatory burdens from our banking system."
Accordingly, he called on President-elect Bill Clinton to reverse the rise in regulatory burdens that have been placed on banks and to allow interstate branching and securities powers for banks. Both were proposed by the Bush administration but rejected by Congress when it passed the 1991 banking bill.
That legislation only added to the unwillingness of banks to extend credit by imposing additional recordkeeping requirements and guidelines, and also added to bank legal liabilities, Greenspan said in the speech. "We can only hope that the new administration and the Congress will see fit to ease some of these restrictions, which are raising bank costs and discouraging lending," he said.
Greenspan said the new laws on the books have "virtually eliminated" so-called character loans that banks routinely made to individuals and small businesses.
In assessing the causes of the credit crunch, Greenspan said part of the problem reflects deep-seated economic problems that monetary policy can affect only marginally, although he noted the Fed has helped by lowering short-term rates.
"Doubtless, by far the greatest source of stagnant loan markets is weak demand," he said. "Both businesses and households have been actively shedding debt perceived as excessive in recent years."
The process of balance-sheet repair will go on until both businesses and households feel their debt levels are at "more comfortable levels," said Greenspan, but he did not say when that time might come. When it does, cash flows can be expected to flow to purchases of goods and services that boost the economy.
Lender restraint has contributed to the weak economy, said Greenspan. While some of the retrenchment was an understandable reaction to sour loans, he added, "an impressive number of worthy applicants" has been rejected by banks that cut off clients from credit. "That sounds more like fear than sound banking practice."
Greenspan rejected arguments that banks have been loading up on government securities instead of lending in order to meet the international risk-capital standards. Instead, he said, Fed surveys have found banks bought Treasuries mainly for their high profitability at a time of weak loan demand. Moreover, credit unions have also been accumulating Treasuries even though they are not subject to the new rules.
Once loan demand picks up, there is reason to believe banks will stand ready to lend, Greenspan said in the speech. "Banks historically have used holdings of liquid securities accumulated during periods of slack loan growth to finance accelerating credit needs once the recovery takes hold."
"We do not see capital standards as standing in the way as this expansion unfolds," he added. The standards take effect Dec. 19, and Clinton has said he will review them as part of his economic strategy.