`Prudent' Banking

THE nation's bank regulators want it both ways. They would like commercial banks and thrifts to be more prudent in their lending and thereby avoid a repetition of the severe real estate losses that some financial institutions suffered in the Southwest and in New England. But the regulators also don't want their stern bank examinations and tougher loan-loss reserve requirements to prompt lenders to be so cautious that these regions - or the nation - slips into a slump should many builders be unable to find funding for their projects. ``We are not saying not to lend,'' L. William Seidman, chairman of the Federal Deposit Insurance Corporation, told the directors of the American Bankers Association last week. ``We are saying they should use their good judgment.''

Good judgment, of course, is what bankers would like to pride themselves on. In normal banking, loan officers must take some risks in funding business activities or they are not doing a good job. Banks assume that a small portion of their loans will not be repaid.

But when bankers get carried away by the ``animal spirits'' of the marketplace, loan losses mount and they get into trouble. During the go-go '80s, too many bankers became sheep. They joined their competitors in lending excessive amounts of money to poorly managed developing nations, assuming that the boom in Texas could go on forever, expecting real estate prices in New England to rise 30 percent a year continuously. Even bankers find it hard not to get excited when everyone else is excited. Yet it is their job to stay calm. By directly telling bankers not to err on the side of caution, the Federal Reserve System (one of the three federal regulatory agencies) hopes to encourage lending without having to boost the money supply sharply and drop interest rates. In the last six months, the money supply has been growing nicely within Fed targets. Interest rates are high enough to keep the US dollar reasonably stable on foreign exchange markets. The economy has slowed to a pace moderate enough to restrain inflation.

The regulators don't want to foul up this relatively good performance of the United States economy, now into the eighth year of an expansion. They don't want a credit crunch.

But some observers already see lenders tightening up on the standards needed to get auto and house loans. ``There's little doubt that a pullback in the extension of credit is affecting economic activity,'' notes Wall Street economist Sam Nakagama.

We hope, with the regulators, that prudence doesn't become prudery in the loan business.