WASHINGTON - Individual banks may suffer in an economic downturn, but the industry as a whole is strong enough to weather even a major economic disruption, Federal Reserve Chairman Alan Greenspan told Congress on Thursday.
Responding to questions after his semi-annual economic report to the Senate Banking Committee, Mr. Greenspan said he believes that some loans, made under lenient credit standards during the height of the current nine-year economic expansion, will go bad in the event of a recession.
"There are basic concerns, and there should be," he said.
However, Mr. Greenspan continued, the industry as a whole is strong, and a recent Fed study found many institutions are already moving to tighten credit policies.
Sen. Paul Sarbanes of Maryland, the committee's ranking Democrat, asked Mr. Greenspan if the period of lax credit quality could lead to "serious banking problems" in the event of a recession.
"I think individual banks will have trouble," Mr. Greenspan replied, noting that an increase in loan losses, which are now at record lows, is all but inevitable in hard economic times.
"But I think with the new technologies that have evolved in the banking industry, the extraordinary capacities that [banks] now have to hedge risks, have put them in a position where they are extraordinarily resistant, in my judgment, to being upended by any type of economic problem that I can perceive," he said.