WASHINGTON - Federal Reserve Board Chairman Alan Greenspan on Wednesday reiterated his warning that bankers should not respond to the economy's recent slowdown by putting the brakes on lending.
"Not surprisingly, in response to past laxity, a weakening economy, and general economic uncertainty, banks have tightened their lending terms and conditions," he said in a speech at the Independent Community Bankers of America's annual meeting in Las Vegas. "Lenders and their supervisors should be mindful that in their zeal to make up for past excesses they do not overcompensate and inhibit, or cut off, the flow of credit to borrowers with credible prospects."
The sustained boom may have left many bankers and regulators without the memory or experience to deal with weakened or troubled loans, Mr. Greenspan said. This has forced lenders to dust off old policies for credit workouts and supervisors to step up their training, he said.
Despite encouraging bankers to continue lending, he reminded them to prepare for a potentially "less agreeable" lending climate.
"Indeed, loans made using credit scoring models that are estimated only on data from the last five or so years may be too optimistic for more normal conditions," he warned.
Bankers generally make the majority of bad loans during an economic cycle's peak, but they should always take a more tempered approach, Mr. Greenspan said. "A more disciplined, less pro-cyclical, long-term approach to lending that provides higher average risk-adjusted returns to shareholders is obviously in the self-interest of banks."
He said that syndicated loans, especially those to leveraged borrowers, and asset quality at big banks are among the industry's most immediate problems, but warned about troubling trends at small banks, too, such as overconcentration of commercial real estate loans.
On the positive side for community banks, slowing loan demand and early signs of increased core deposits could ease liquidity strains, he said.
"The demand for loans by businesses and consumers appears to be moderating, and there are some early indications that consumers are returning to bank retail deposits in the wake of disappointing stock and mutual fund results," he said.
The Fed chairman urged the community bankers to make sure they have enough capital and reserves.
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