Senators on Wednesday pressed Federal Reserve Board Chairman Alan Greenspan to explain his credit quality warnings.
Testifying before the Senate Banking Committee, Mr. Greenspan repeated concerns he voiced a day earlier to a House Banking subcommittee. "All too often at this stage of the business cycle, the loans that banks extend make up a disproportionate share of total nonperforming loans," he said.
But answering a question from Sen. Connie Mack, R-Fla., Mr. Greenspan acknowledged that risky lending is not yet producing widespread losses.
"There is nothing at this stage that says that our banking system is unsound ... We are very well capitalized, very profitable, and we are doing exceptionally well," he explained. "I am saying now is the time when you make the loans which you wish you hadn't."
Senators praised Mr. Greenspan's remarks.
"A number of us have become concerned with respect to the quality of those loans, and I am pleased ... that you have your own concerns," said Senate Banking Chairman Alfonse M. D'Amato.
The Fed chairman came under heavy questioning about his support of the Clinton administration's request for $18 billion for the International Monetary Fund to rescue troubled Asian economies.
Sen. Richard C. Shelby, R-Ala., questioned whether the United States is pouring money "down a rat hole" if it cannot assure that the countries will open their economies or alter their financial systems.
Mr. Greenspan insisted that, despite past criticisms, the IMF would not abet "crony capitalism." He emphasized that sovereign nations cannot be forced to comply with the IMF's terms, but said he was convinced South Korea and other countries have recognized that reforming their financial systems is in their self-interest.
Regarding the looming year-2000 computer snafu, Mr. Greenspan said the interconnectedness of the financial system intensifies the problem. Institutions that fix their computer systems may still suffer breakdowns if others they do business with are unprepared. "You could end up with a very small number of noncompliers and have a very large problem," he said.
Mr. Greenspan added that the Fed is having trouble computing how much the year-2000 problem will cost the economy.