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Fed urges loan flexibility
September 14, 2001: 4:54 p.m. ET

Asks banks to make credit easier, warns of balance sheet fluctuations
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NEW YORK (CNNfn) - The Federal Reserve urged banks in the United States to be flexible when extending credit to businesses and individuals recovering from the worst terrorist attack in U.S. history, but also warned that increased loan and deposit activity could have a temporary impact on bank balance sheets.

"The Federal Reserve has had a longstanding policy of encouraging bankers to work flexibly with customers, whether companies or individuals, who have been affected by disasters," the Fed said.

The Fed has been reassuring the nation that money is available in the days following Tuesday's terrorist attacks that leveled the World Trade Center in New York and damaged the Pentagon near Washington, D.C.

It also has aided the European Central Bank, swapping $50 billion in currency to meet cash needs in Europe.

Many economists expect it soon will cut its target for short-term interest rates for the eighth time this year in an effort to make money more available to U.S. consumers and avert a recession.

Among the specific moves banks can make to be more flexible, the Fed said, are easing documentation requirements for loan applications and extending grace periods.

"Conducted in a prudent way, such practices are consistent with safe and sound banking practice and promote the public interest by assisting in recovery," the Fed said.

The Fed warned, however, that the unusually large number of loans to be made in the aftermath of the attacks, combined with increased deposits, likely will throw banks' balance sheets out of kilter. According to government regulations, banks must keep a certain ratio of assets to liabilities in order to be classified as well-capitalized institutions.

"It's just a precautionary notice to tell banks they've got to be watching this," said Jim McLaughlin, director of regulatory affairs at the American Banking Association.

If banks think they're getting into trouble, then they should contact government regulators to let them know. Regulators will be understanding, McLaughlin said, since they're encouraging banks to be liberal with loans. In any event, the effect on banks should be temporary.

"Capital levels are extremely high," McLaughlin said. "Banks will be in good shape." graphic


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