March 23, 1997 in Nation/World

Greenspan Urges Lenders To Be Cautious Warning Seen As Hint That Fed Preparing To Hike Interest Rates

Associated Press

Federal Reserve Board Chairman Alan Greenspan warned bankers Saturday to review their lending practices and urged them to be cautious, giving another clue the Fed may be about to raise interest rates.

“Some modest underwriting laxity has a tendency to emerge during good times,” Greenspan said in a speech to the Independent Bankers Association of America.

The Fed’s Open Market Committee is scheduled to meet Tuesday and will try, most analysts believe, to prevent inflation by increasing the benchmark rate banks charge one another for overnight loans by a quarter of a percentage point to 5.5 percent.

That probably would prompt banks to raise the prime rate charged their best business customers, now at 8.25 percent, thus raising borrowing costs for millions of businesses and consumers who pay rates tied to the prime.

Greenspan’s previous warnings against “irrational exuberance” and “excessive optimism” in financial markets have been seen as an effort to prepare markets for the likelihood of higher interest rates. His remarks to bankers Saturday bolstered that interpretation.

Last month, a Federal Reserve survey of senior loan officers showed the nation’s largest banks were exercising caution when it came to consumers. They reported toughening standards for credit cards and other unsecured loans and promoting home equity borrowing instead.

However, many lenders reported they had eased terms on business loans over the past three months.

Greenspan’s remarks come a week after regulators said profits at the nation’s 9,500 commercial banks hit a record $52.4 billion last year despite a record number of personal bankruptcies - pushing past 1 million for the first time - and record numbers of consumers falling behind on their credit card bills.

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