Small-business lending will not be crimped by the banking industry's rapid consolidation, regulators told lawmakers Wednesday.

"I am optimistic about the outlook for small-business credit," said Federal Reserve Board Governor Janet Yellen at a hearing before the House Small Business Committee.

Ms. Yellen disagreed with dire predictions for small-business lending made by Fed economists in March. The economists showed bank lending to small business declined 34% from 1989 to 1994, and warned it could drop another 32% during the next five years. Ms. Yellen criticized those predictions as being based on insufficient information.

In support of her upbeat forecast, she said the number of bank commercial loans of $1 million or less increased more than 7% between June 1994 and June 1995.

Agreeing with the rosy forecast, Andrew C. Hove Jr., Federal Deposit Insurance Corp. vice chairman, asserted that the decline in small-business lending has already been reversed. "The strength of the banking industry over the past three years has been accompanied by increased lending to small businesses," he said.

Mr. Hove said the viability of community banks - the biggest source of small-business loans - will not be threatened by consolidation. In three of the last six years, banks with assets of less than $100 million enjoyed above-average profits, he said.

Lawmakers were skeptical, however.

Rep. John LaFalce, D-N.Y., predicted the wave of mergers will greatly thin the ranks of community banks willing to lend to small businesses. "Out-of-state bank holding companies show lower rates of small-business lending than local institutions," he said, citing the Fed report.

Troubled by Ms. Yellen's disagreement with the Fed economists, Small Business Committee Chairwoman Jan Myers asked the central bank to prepare a more detailed analysis of small-business lending.

P. James Dowe Jr., president of Bangor Savings Bank in Maine, asked lawmakers to double the limit on commercial lending by thrifts to 20% of assets. Frank A. Suellentrop, chairman of the Community Bankers Association of Kansas, urged Congress to pass pending regulatory relief bills, which would ease many consumer protection and compliance rules.

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