WASHINGTON - Alan Greenspan, chairman of the Federal Reserve Board, told a House panel Wednesday that banks should not be pressured to increase lending simply because their profits have improved.

But Mr. Greenspan said lending efforts of banks, particularly in New England, remained "unacceptable".

And he agreed that banks have been too slow to pass along the benefits of lower interest rates to their customers.

A Congressman's Question

The Fed chairman was replying to criticisms levied by Rep. Richard Neal, D,-Mass., at a hearing of the House Banking subcommittee on domestic monetary policy.

"Isn't it intellectually dishonest for them to report extraordinary profits and then not do what the charter requires?" Rep. Neal asked Mr. Greenspan.

"You can't assume that what the borrower is paying you is interest on the loan itself," Mr. Greenspan replied, a reminder that in the current economic environment, many loans that are currently good ones could turn bad.

He added, "I wouldn't argue that if [banks] have earnings, then their lending inclinations should increase."

Second Day on Hill

Mr. Greenspan was on Capitol Hill for the second day of the Fed's semiannual report to Congress on monetary policy, and his remarks differed little from testimony he delivered to the Senate Banking Committee on Tuesday.

His main theme was certainly the same the economic recovery, though slow, remains on track and should pick up speed in coming months.

Mr. Greenspan said one encouraging sign was that banks' balance sheets and capital positions have "clearly materially improved," though they remain "extraordinarily sensitive" to certain types of lending, such as commercial mortgages.

Mr. Greenspan told the panel that many banks are still shaking off the trauma of a lengthy period of loan losses and capital erosion.

"It hasn't worn off yet," Mr. Greenspan said.

Mr. Greenspan said bank lending could get a boost if the Fed succeeds in eliminating banks' leverage capital requirements.

In addition to maintaining 8% capital against risk-adjusted assets, banks are required to maintain leverage capital at 4% of assets to cover other risks, such as shifts in interest rates.

Mr. Greenspan said the leverage ratio was "much too draconian," and should be dropped once risk-based capital has been adjusted to reflect interest-rate risk.

The Fed is currently seeking comment on proposed interest rate risk rules.

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