Federal Reserve Chairman Alan Greenspan said Thursday that the banking system is the healthiest it has been in years but raised the possibility that banks may be relaxing their loan standards too much.
“In recent months I have begun to receive reports from examiners and from surveys that banks are competing more aggressively for loans, and they are relaxing their credit standards,” the Fed chairman said.
“It is too early to know if banks are easing excessively, but our examiners are sensitive to such concerns,” he added.
Greenspan’s comments were in testimony before a Senate Banking Committee hearing on the condition of the banking industry.
Bank failures surged in the late 1980s and early 1990s after energy, agricultural and real estate loans went bust.
The fund that insures bank deposits fell into the red, raising fears of a thrift-style taxpayer bailout.
Banks subsequently tightened their credit standards, triggering the “credit crunch” that strained businesses and consumers trying to get loans and contributed to the recession.
Greenspan made clear that for now the Fed sees no “major problems looming” for the nation’s banks.
He said the industry is on track to post a third straight year of record profits.
“The banking system is stronger now than it has been in many years, and it seems well prepared to meet the nation’s credit needs,” he said.
Greenspan warned the banking industry, however, against becoming complacent and allowing its reserves to fall so much that they might be inadequate to meet potential trouble down the road.
He noted that some banks have sharply curtailed or even eliminated the amount of provisions they set aside for loans likely to go sour.
Many banks took no loan-loss provisions in the first half of the year.
“I am not questioning those decisions at this time . . . ,” the Fed chief said.
“Nonetheless, I would urge the industry to guard against letting reserves decline too far.”
