US banking system 'can cope with interest rise'
The banking system in the United States is in good shape to deal with rising interest rates, Federal Reserve chairman Alan Greenspan has told Congress.
“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 past 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, increasing the chance 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.”
Asked by Senate Banking Committee chairman Richard Shelby if Greenspan felt optimistic about the economy and job creation, the Fed chief responded: “I do.”
Greenspan, citing strong retail sales and other economic data, said “things have picked up again”.
He said he believed that “inflationary pressures will be reasonably well contained” so long as companies continue to produce healthy productivity gains.
Fed policy-makers have held a short-term interest rate at a 45-year low of one per cent 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 US 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.
The recent increase in banking merger announcements, which came after consolidation activity had slowed sharply in previous years, “may signal a return to a more rapid pace of bank merger activity,” the Fed chief said.
