A trade group representing 3,000 bank directors is concerned that credit warnings issued by acting Comptroller of the Currency Julie L. Williams will alarm smaller banks and prompt a recession.

"If the banking agencies were to scare banks away from granting not just excessively risky loans, but also prudent loans to their community, then a recession could be triggered simply by the widespread contraction of credit," David Baris, general counsel of the American Association of Bank Directors, warned in an Oct. 9 letter to Ms. Williams.

In recent speeches Ms. Williams has flagged the agency's 1998 survey of credit underwriting practices, which found standards have slipped for four consecutive years. The survey covered 77 national banks, which hold 86% of the loans in the national banking system.

Ms. Williams has warned that if the situation continues, it could affect the health of the economy, and she has threatened punitive measures against banks with unsafe conditions.

In an interview Mr. Baris said 90% of the country's 9,000 banks are smaller than the ones included in the Comptroller's survey.

"The smaller banks will see this and think, 'Gee, well, we better tighten credit,'" he said. "A lot of these community banks are located in smaller towns where they may be the only bank in town."

Mr. Baris said that tight lending policies, even at such smaller banks, could adversely affect the national economy.

In addition, he questioned the fact that the letter was sent to individual directors, as well as to bank executives. Mr. Baris claimed that bank directors, fearing a repeat of a rash of lawsuits and enforcement actions that took place in the late 1980s and early 1990s, will unnecessarily tighten their underwriting standards.

"I think she needs to clarify her remarks," Mr. Baris said. "She could have done the same thing without the scare tactics."

A spokesman for the agency defended Ms. Williams.

"Every banker knows the difference between a good credit and a poorly underwritten loan and we are confident that bankers will continue to help the nation's economy grow by lending money to good borrowers on sound terms," the spokesman said.

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