Business and Finance

The Federal Reserve and other U.S. regulators told banks to maintain lending to “creditworthy'' borrowers, and warned against dividend levels that would cut funds available for loans, causing a deeper economic slump.

Supervisors “will take action when dividend policies are found to be inconsistent with sound capital and lending policies,'' the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision said in a statement. Dividends shouldn't be at levels that would hurt the ability “to meet the needs of creditworthy borrowers.''

The message to lenders follows increasing pressure from Congress, where legislators have expressed concern that banks won't use the capital injections from the government's $700 billion rescue program toward reviving credit. Senate Banking Committee Chairman Christopher Dodd tomorrow holds a hearing with four of the biggest U.S. banks on their use of bailout funds.

Federal regulators also warned banks on executive- compensation levels and on helping homeowners keep their properties by modifying mortgages. Democratic lawmakers have pushed on both counts in recent weeks.

A record share of U.S. banks made it harder for companies to borrow, the Fed's latest quarterly survey of senior loan officers showed last month. About 85 percent of domestic banks surveyed tightened lending standards on commercial and industrial loans to large and mid-size firms, the most since the survey began in its current format in 1991.

`Appropriate Lending'

Regulators will encourage banks to “practice economically viable and appropriate lending activities'' to avoid deepening the economic downturn, the agencies said cash advance loans. “Regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement.''

The agencies also urged lenders and servicers to adopt “systematic'' ways to modify troubled loans.

In addition, banks' executive compensation policies should “prevent short-term payments for transactions with long-term horizons,'' the agencies said.

Executives from JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and Wells Fargo & Co. are scheduled to testify in tomorrow's hearing.

All four banks are receiving billions of dollars of capital in the form of government stakes as part of the bailout program. Dodd, a Connecticut Democrat, said last month that “we need more than just begging'' to ensure that banks use the new funds to lend, rather than hoard the cash.

Senator Charles Schumer, a New York Democrat, wants firms to place limits on dividends and executive pay before getting capital under the financial-rescue program. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has called for a moratorium on Wall Street bonuses.

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