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Greenspan confident in banking system

“Many banks seem to believe that as rates rise — presumably along with greater economic growth — they can increase lending rates more than they will need to increase rates paid on deposits,” Greenspan said.
/ Source: The Associated Press

The nation’s banking system should remain healthy, even in a climate where interest rates are rising, Federal Reserve Chairman Alan Greenspan told Congress Tuesday.

“In general, the industry is adequately managing interest-rate exposure,” Greenspan said in prepared testimony to the Senate Banking Committee, which was holding a hearing on the state of the banking industry.

Low mortgage rates over the last several years have kept banks busy on the consumer side of the business, especially in providing loans for people to buy homes or refinance the ones they already own.

As the economic recovery has gained momentum and investors begin to raise the odds that Federal Reserve policy-makers may boost short-term interest rates later this year, long-term rates, such as those for mortgages, have been recently on the rise.

“Many banks seem to believe that as rates rise — presumably along with greater economic growth — they can increase lending rates more than they will need to increase rates paid on deposits,” Greenspan said.

“Certainly, there are always outliers, and some banks would undoubtedly be hurt by rising rates,” Greenspan added. “However, the industry appears to have been sufficiently mindful of interest rate cycles and not to have exposed itself to undue risk.”

Greenspan, in his testimony, didn’t discuss the future course of short-term interest rate policy in the United States or the overall economy.

Fed policy-makers have held a short-term interest rate at a 45-year low of 1 percent since last June, with the hope that low borrowing costs might motivate consumers and businesses to spend and invest more, forces that would lift economic growth.

Many private economists believe the Fed will leave rates alone at its next meeting on May 4. But after that, they have differing opinions about where short-term interest rates are heading. Some economists believe the Fed will start to nudge up rates in the summer. Others don’t believe rates will move higher until 2005.

On other banking matters, Greenspan said a spate of banking mergers the country has seen has not harmed the overall competitiveness of U.S.banking and financial markets and has helped to facilitate more services and a variety of new products to consumers, he said.

“Measures of concentration in local banking markets, both urban and rural, have actually declined modestly not just since 2000 but since the mid 1990s,” Greenspan said.

“Significantly, most households and small and medium-sized businesses obtain the vast majority of their banking services in such local markets,” he said.