Fed May Free Some Bank Reserves to Ease Credit Crunch : Lending: The somewhat limited plan would make more cash available for loans and send a signal to banks not to be so restrictive.

The Federal Reserve Board, concerned about a worsening credit crunch, is considering a limited plan to increase the amount of money available to banks for lending in hopes of easing the current credit squeeze, Fed officials said Monday.

The plan would reduce the amount of cash reserves that banks must maintain against their deposits, which effectively would free up those funds for additional lending. The idea would be to send a signal to banks not to be so restrictive in their lending.

But the easing, if it comes, would only affect reserve requirements involving jumbo certificates of deposit and other large accounts, on which banks currently must set aside 3% of their deposits as reserves.

Officials said the Fed has no plans to ease the current 12% reserve affecting checking accounts and time deposits.

A Fed spokesman said the central bank has been studying the proposal for “several months” as a way to help mitigate the credit squeeze that has occurred in some areas because banks have tightened their lending standards in an effort to shore up their financial positions.

Fed policy-makers increasingly have begun to fear that these restrictive lending practices might worsen the current economic slump.

The proposal comes at a time when the Bush Administration is increasing its pressure on the Fed to deal with the worsening credit crunch. President Bush raised the issue with Fed Chairman Alan Greenspan when they met earlier this month at the White House.

While the Administration has not been pushing specifically for a change in reserve requirements, the White House still welcomes the Fed’s willingness to consider moves to ease its grip on the nation’s banks.

A senior Bush official said Monday that the Administration “has been pushing for various policies to expand liquidity in the banking system” and added that “we are less concerned with how it is done than the fact that the problem is addressed.”

Frightened by a slowdown in the economy and their potential exposure to risky real estate loans, many of the nation’s banks have been sharply cutting back on their lending, even to credit-worthy commercial and personal borrowers.

The cutback has been most noticeable in the Northeast, where increasing numbers of small businesses have been forced into bankruptcy proceedings after their credit lines have been canceled by skittish bankers.

“You have real estate loans going bad in some parts of the country and banks are taking loan losses. And so the banks get very conservative in their lending,” the Fed spokesman said Monday.

“This is one of the tools we have” to counter that trend and infuse more money into the system, he added.

Government officials and outside analysts stressed that a slight easing of reserve requirements probably would not be likely to make the banking system any more vulnerable. Indeed, the government is currently imposing tougher requirements on the more troubled banks.

As a result, they said, the weakest banks are not likely to be able to increase their lending activity significantly if the proposal is put into effect.