--Greenspan: Regulators need to be sensitive to near-term bank problems
--Greenspan says weak economy may test banks in "coming quarters"
--Greenspan warns banks against curbing lending too much
--Greenspan says US banking system strong as economy weakened
--Greenspan makes no comments on Fed monetary policy in testimony
--Fed: Problems for some banks could worsen due to weaker economy
By Edward Kean Washington, June 20 (BridgeNews) - The health of the U.S. banking system appears to be deteriorating, and banking supervisors will need to become "more sensitive to problems at individual banks, both currently and in the months ahead," Federal Reserve Chairman Alan Greenspan said Wednesday.
In prepared testimony to the Senate Banking Committee, Greenspan said the ability of banks to respond to the current weakness in the U.S. economy has been tested by the recent economic slowdown, "and may well be tested further in coming quarters." Greenspan made no direct comments monetary policy in his prepared remarks. The Fed chairman is testifying along with several banking regulators about banking issues. Greeenspan told the panel that many traditional indicators "suggest that bank asset quality is deteriorating."
Some of the loans that were made when economic conditions were better, especially syndicated loans, are "now under pressure and scrutiny", he said. The softening economy, or special circumstances, has particularly affected borrowers in the retail, manufacturing, telecommunications, and health care industries, he said. As a result, bank management and supervisors will need to remain "particularly alert to developments." However, Greenspan said the U.S. "fortunate" that the banking system entered the current period of weak economic performance in a "strong position." Banks have "prudent capital and reserve positions" and they have also improved their risk management systems. That may have shortened the response time of banks to changes in economic events. Greenspan's warning that the weak economy may test banks further "in coming quarters" suggest that he sees a risk that the current economic weakness may persist a while longer.
At the same time, Greenspan cautioned banks against excessively cutting back on their loans. He noted that when the economy begins to slow, there is a tendency to reject new loan applications that would earlier have been judged "creditworthy." "Such policies are demonstrably not in the best interest of banks' shareholders or the economy," he said. They cause unnecessary volatility in bank earnings and reduce overall values of the bank.
"More importantly such policies contribute to increased economic instability," he said. In a report on the banking system prepared by the Federal Reserve's staff, which was released with the testimony, the Fed cautioned that problems could worsen for some banks and some market segments because of the weakening economy. The Fed staff did say that the banking industry is "in reasonably good shape" while acknowledging signs of erosion in the overall health of the industry.