Banking system called sound by Greenspan

Delinquency rates fall in many loan categories

March 18, 2004|By BLOOMBERG NEWS

WASHINGTON - U.S. banks are strong and profitable, with "favorable" asset quality, and able to provide financing for a growing economy, Federal Reserve Chairman Alan Greenspan said yesterday.

"The weakness in credit quality that accompanied the recent recession has clearly been mild, and the system remains strong and well positioned to meet customer needs for credit and other financial services," Greenspan told the Community Bankers Convention in San Diego via satellite. "The outlook for asset quality is also favorable."

Delinquency rates have fallen in many loan categories since the expansion began in November 2001. About 1.74 percent of residential bank loans were delinquent in the final quarter of last year, compared with 2.25 percent in the final quarter of 2001. Credit card delinquencies stood at 4.62 percent in the final quarter of 2003 vs. 4.86 percent in the final quarter of 2001.

Still, the lowest borrowing costs in decades are encouraging consumers to take on more debt and interest service even as overall incomes are declining. Fed officials left the overnight lending rate at 1 percent, the lowest since 1958, at Tuesday's meeting of the Federal Open Market Committee.

In recent speeches, Greenspan has said that financial innovation, such as derivatives securities that allow banks to off-load the credit risk on loans, helps banks manage their portfolios.

While small banks are losing some share of the mortgage market, loans to land and commercial real estate developers accounted for more than 90 percent of net asset growth for banks with less than $1 billion in assets last year, he said.

Even though there have been few delinquencies in these types of loans, "bankers need to be aware of the historical real estate cycle that, in the past, placed such exposures under severe stress," Greenspan said. "One hopes that improvements in underwriting standards are lasting."

The Fed chairman also predicted banking mergers "will undoubtedly continue," and said the central bank would work to ensure the application of new international capital lending standards won't "distort competitive markets" in the United States.

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