Brady Asks Regulators Not to Constrain Banks : Credit: The Treasury Secretary’s remarks follow complaints that federal heavy-handedness has kept institutions from making loans even to good risks.

WASHINGTON —  Amid growing concern about a scarcity of credit, Treasury Secretary Nicholas F. Brady on Tuesday urged regulators not to overreact to the softening economy by discouraging banks from making reasonable loans.

“Use some judgment. Apply some balance. Don’t use unrealistically negative scenarios in evaluating loans. Don’t overreact,” Brady said in remarks directed to bank examiners.

Speaking in New York to the Arthritis Foundation, Brady also signaled that the Administration wants the dollar to stop falling. A text of his speech was released in Washington.

His comments on the so-called credit crunch follow a series of meetings on the deteriorating economy conducted by President Bush at the White House last week, first with his top advisers, then with business executives.

Bankers and some business owners have complained for nearly a year that regulators are cracking down too hard in the wake of the savings and loan debacle, hurting an already-weak economy.

Regulators have responded that they were simply urging prudence in response to more fragile economic conditions, particularly in the commercial real estate industry.

Brady conceded that “traditional lending standards applied by many banks clearly eroded” during the long economic expansion of the 1980s. But, he cautioned regulators, “be mindful of the effect your behavior can have on the willingness of banks to take even the reasonable risk of lending to good credits.”

“We need a banking system that is a taker, not a shedder, of such risks,” he said.

On Monday, the Federal Reserve reported that a survey of lending officers showed that bankers were becoming increasingly cautious about making loans, not only to commercial real estate developers, but also to large corporations and home buyers, borrowers generally considered safe.

“Let me offer a word to banks,” Brady said. “I urge you to keep lending to your good customers. . . . Let’s not overreact to the economy or to the regulators.

“Your franchise depends upon your continued willingness to stand by your customers. I urge you not to walk away from those whose trust you have worked so hard to earn.”

Some banks have cut back lending because they must meet stricter capital standards taking effect in January under an international agreement. But Brady said banks had alternatives, including cutting costs, reducing dividends or seeking a merger partner.

He also sought to calm fears about the condition of the banking industry, saying, “The banks of 1990 are not the S&Ls; of the 1980s. They are as different as chalk and cheese.”

He said banks have a capital cushion of $200 billion to absorb losses, 6% of their assets, compared to $10 billion for S&Ls; in 1987--1% of their assets.

Regarding the dollar, Brady said the deficit reductions in the 1991 budget adopted by Congress last month “should promote renewed and welcome stability in exchange markets.” And, he said, “policies that promote stability in the dollar exchange rate are a plus, not just for the United States, but for the world economy at large.”

Until Tuesday’s speech, Treasury officials had expressed little concern about the dollar, which has been declining for most of the year and is trading near post-World War II lows against the German mark. It also has fallen sharply against the Japanese yen.

A weak dollar worsens inflation in the United States by driving up the cost of imports, but it improves U.S. trade performance by making American goods cheaper on overseas markets.