Greenspan Notes Pressure on Banks To Increase Rates
WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan said that U.S. banks are being forced by changing market conditions to make higher-risk loans, and that they must raise rates commensurately to remain profitable.</br></br>Speaking to a conference on bank structure hosted by the Federal Reserve Bank of Chicago, Mr. Greenspan said banks need added securities-underwriting powers to remain viable. He urged the House to follow the Senate's lead in repealing most Glass-Steagall Act restrictions on banks' securities underwriting. Copies of the speech were made available here.</br></br>Separately, Congress's General Accounting Office recommended that banks be required to increase very substantially their reserves for troubled international loans. The GAO estimated that U.S. banks have reserves totaling about $21 billion against their troubled loans to less-developed countries, while $49 billion is needed.</br></br>In his speech, Mr. Greenspan said that although many banks currently "are doing reasonably well," bank profitability is likely to erode over time. Many of the "highest-quality business borrowers" have turned to the securities markets, where they can raise funds more cheaply than they can from banks, he said.</br></br>Banks have found their remaining customers to be "less credit-worthy than earlier in the postwar period," he said. "The current ability of the nonfinancial corporate sector to cover its debt-servicing costs out of earnings is low," he explained, adding, "for many firms, it is uncomfortably low."