Vary Business Loan Rates, Fed Chief Urges

Federal Reserve Chairman Alan Greenspan Wednesday urged the banking industry to revamp the way it prices loans to businesses. He suggested that banks vary the interest rates they charge according to companies’ credit history.

Greenspan, in a speech at the University of Utah in Salt Lake City, said that moving away from a one-price-fits-all lending policy would help banks retain their customers, would benefit borrowers and would work to make the economy more efficient.

The Fed chief also called for a change in the way banks are supervised. He suggested that regulators should be ready to allow banks to take considerable risks with money, provided they have the sufficient capital and reserves.

“In my view, the majority of banks are playing a losing game with their current and potential competitors by employing only one interest rate per facility for borrowers of widely varying risk,” the Fed chairman said in his prepared remarks, which were released here.

That means banks’ best business customers are being overcharged for loans and could be tempted to look elsewhere for money in the future, he said.

Some big corporations already are bypassing banks and borrowing directly from investors via commercial paper, a form of I.O.U. Or they are turning to finance companies and other non-bank lenders, such as General Electric Co.’s credit arm.

“If banks overcharge their better quality smaller borrowers in order to charge the same loan rate to their lower quality borrowers, we can expect the better quality smaller borrowers to follow in the footsteps of their large corporate brethren and seek credit elsewhere,” Greenspan said.