Fed Governor Says Banks Too Eager
                   To Lend, Despite Boom Economy

                   Dow Jones Newswires

                   WASHINGTON --Federal Reserve Governor Laurence Meyer warned
                   Monday that U.S. banks are getting complacent in their loan-making,
                   betting too confidently that the U.S. economic boom will last long enough
                   to prevent their loans from turning sour.

                                        "Lenders are relying too much on the
                                        continuation of good times," Mr. Meyer said in
                                        prepared remarks to the Institute of
                   International Bankers. "They're assuming a very optimistic view of their
                   borrowers' operating prospects and that their borrowers will have ready
                   access to financial markets."

                   Mr. Meyer, repeating a warning he first sounded in June, said that although
                   overall credit quality at U.S. banks remains strong, it has weakened over
                   "the past several quarters." According to Fed data, the proportion of
                   problem assets at the country's 50 biggest banks increased last year for the
                   first time since 1991 - a trend that accelerated in the first half of 1999.

                   "That's troubling because the increase has surfaced despite the continuation
                   of favorable economic and financial conditions in the United States," Mr.
                   Meyer said, in a speech that otherwise made no reference to the outlook
                   for the U.S. economy or for Fed monetary policy. "It appears the
                   vulnerability of these loans was heightened in some cases by weak
                   underwriting practices."

                   U.S. banks, he said, are "failing to subject loans to meaningful 'stress tests'
                   that would, for instance, tell them if their borrower could withstand an
                   unexpected shock to operating revenue." Such developments, he said,
                   "tend to get the attention of bank supervisors, and ought to get the attention
                   of banks and other lenders."

                   Fed data show that non-accrual loans and problem real estate at the
                   country's 50 largest banks rose to 0.81% of all loans in the first half of
                   1999 from 0.76% in all of 1998. The increase followed a seven-year
                   stretch in which problem loans fell steadily to record lows.

                   Declining credit quality sometimes portends an economic downturn,
                   especially in countries that have enjoyed years of rapid economic growth.
                   Fed officials, however, don't see the threat of an imminent downturn in the
                   U.S., where banks remain both more profitable and less burdened by
                   problem loans than their European counterparts. Still, Mr. Meyer said U.S.
                   banks shouldn't get complacent.

                   But Mr. Meyer said the U.S. banking industry as a whole doesn't need the
                   tighter capital-adequacy standards proposed by the Basel Committee on
                   Banking Supervision, a panel of international central bankers. The panel
                   wants banks to set aside capital based on the actual risk of default by a
                   borrower. Currently, banks don't have to set aside any capital when they
                   make loans to institutions within the 29-country Organization for Economic
                   Cooperation and Development.

                   "While I applaud the direction in the Basel consultative paper toward a
                   more sophisticated and more risk sensitive minimum capital standard, I do
                   not believe this more complex system is warranted or appropriate for the
                   overwhelming majority of U.S. banks."

                   Instead, he said, bank capital requirements should distinguish between "the
                   overwhelming majority of small- and medium-size banks" and "the largest
                   and most complex banking organizations." The Fed, he said, already is
                   considering a "bifurcated" system in which small- and medium-size banks
                   will be asked to meet a simpler standard that for large banks.

                   "We already have different intensities of supervisory oversight at large
                   complex banks and at small- and medium-sized banks, and have singled
                   out a very small number of the largest and most complex banks for a
                   program that features an enhanced focus on risk management and internal
                   controls...," Mr. Meyer said. "This trend will continue."

                   Mr. Meyer said central banks need to retain a key role in the oversight of
                   banks, and he criticized the decision of governments in such countries as
                   the United Kingdom, Australia and Switzerland for stripping their central
                   banks of bank-oversight responsibility. In those countries, central banks
                   simply conduct monetary policy and while another regulatory agency
                   oversees commercial banks and other financial institutions.

                   "I wish our colleagues abroad the best of luck, but I think their legislatures
                   have made a mistake," Mr. Meyer said. "The argument is that in a market
                   that has increasingly eroded differences among and between financial
                   institutions, the uniqueness of banks has declined and the combining of
                   financial-institution regulators...makes sense."

                   "But please note that they have continued to make their central banks
                   responsible for financial stability," he said. "While macro financial tools and
                   monetary policy may be sufficient to do that job most of the time,
                   supervisory and regulatory policies have important economic and stability
                   implications.

                   "Particularly in a crisis, a central bank without knowledge of the way
                   markets actually operate -- knowledge that can be gained only by
                   experience and hands-on contact with banking organizations -- will be ...
                   at risk of failing its final exam," he said. "As a result, I think the separation
                   of central banking and supervision and regulation is dangerous."