WASHINGTON - Rarely do bank regulators differ on the issue of credit quality, but on Tuesday, it was clear that for at least a moment, Federal Reserve Board Chairman Alan Greenspan and Federal Deposit Insurance Corp. Chairman Donna Tanoue had stopped reading from the same page.

In comments that came as a surprise to many, Mr. Greenspan veered from admonishing the industry against easy credit and instead warned bankers and regulators that overreacting to a slowing economy and deteriorating asset quality could spur a credit crunch.

"Though lenders will be viewing new transactions with greater caution than they did a couple of years ago, both bankers and their supervisors should now guard against allowing the pendulum to swing too far the other way by adopting policy stances that cut off credit to borrowers with credible prospects," Mr. Greenspan said.

Certainly the remarks were a sharp departure from the earlier tone of Mr. Greenspan and other regulators, who have been cautioning lenders to tighten their underwriting standards since the mid-1990s. For the past several months FDIC Chairman Tanoue has sounded alarms about credit quality, and she actually reiterated her warnings at a press conference Tuesday on the banking industry's third-quarter earnings at almost the same time Mr. Greenspan was speaking.

"Unlike earlier in the year, no comparable problems plagued the commercial banking industry in the third quarter," Ms. Tanoue said, "but concerns for the future remain - particularly in credit quality. These concerns darken an otherwise sunny picture."

Naturally, the crossfire sparked some debate. David D. Gibbons, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, saw a method behind Mr. Greenspan's change of tone.

"It is important to do your best to ensure you don't go from one end of the spectrum to the other," he said in an interview Tuesday. "We have been talking about not bringing the pendulum back too far."

In his speech at an America's Community Bankers conference in New York, Mr. Greenspan outlined the indicators that have begun to signal a slowing economy, but took pains to give the impression that everything is under control.

He characterized the recent tightening of banks' credit standards as "the expected byproduct of the economy's transition to a more sustainable balance in the growth of supply and demand."

After noting that "pockets of weakness have emerged" in the large syndicated loan market and that bank asset quality has been deteriorating, he said banks are "generally well prepared" to face such conditions.

"The industry's base of earnings is historically strong and well diversified, and although credit costs as well as problem and classified assets have risen, they remain historically modest relative to assets and capital," he said.

Mr. Greenspan - citing a recent Fed survey that found more than half of bank senior loan officers expect credit terms to tighten further in 2001 - said that recent trends "are inducing more realistic assessments of risk by banking organizations."

Though he encouraged banks to develop better credit standards, he also warned that "it is important that the response of management to these concerns not be overdone."

The banking industry's reaction to the speech ranged from laudatory agreement to cautious skepticism, with many falling in between.

"There is a book out about Mr. Greenspan called The Maestro. This is a demonstration of why he is referred to in such reverential terms," said Carl L. Tannenbaum, chief economist at ABN Amro/LaSalle Bank in Chicago. "His problem is modulating the expectations of bankers, investors, consumers, and businesses without destroying them. The mood was pretty dark last week in the markets and there was an important risk of recession - clearly what was needed was a confidence booster."

"It was not the typical sermon about sound underwriting that you expect from a central banker," said Keitaro Matsuda, chief economist for Union Bank of California. "He seems to be trying to avoid a full-scale credit crunch, and that is quite understandable considering what has been happening in the economy. But the Fed does not want business investment to stop growing."

Sung Won Sohn, chief economist at Wells Fargo & Co., said he read Mr. Greenspan's pronouncement as advocating two incompatible goals.

"Chairman Greenspan really has a split personality: one side a regulator and one side an economist," he said. "The regulator in him says that banks should be careful about asset quality. … As an economist, I heard him say that if credit standards tighten too much, that will slow the economy even more rapidly and this could lead to a recession and worse asset quality."

But Mr. Sohn said that once bankers have time to digest the speech, their reaction may be the opposite of what Mr. Greenspan intended.

Banking trade group officials generally approved of Mr. Greenspan's remarks.

"It is a good message and a surprising one coming from a regulator," said James Chessen, chief economist for the American Bankers Association. He said that Mr. Greenspan's acting early, particularly to rein in fellow regulators, may be a reaction to the widespread belief that the credit crunch of the early 1990s was caused by regulators forcing banks to over-tighten their lending standards.


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