By Martin Crutsinger

Federal Reserve Chairman Alan Greenspan said Thursday he sees signs that an improving economy is finally beginning to break the grip of the credit crunch that has stifled business lending the past two years.

However, the ever-cautious head of the nation's central bank said it was too soon to declare victory. He pledged that federal regulators would continue doing what they could to ease regulatory burdens that bankers have complained are a big part of the problem.

"As I review the current banking system, I find reasons for optimism, but not complacency," Greenspan told the House Small Business Committee.

He said that while banks had been forced to write-off $ 125 billion of bad loans over the past five years, their profits soared to a record $ 32 billion last year. The profits enabled banks to build their capital reserves, the cushion they have against future losses, to their highest levels in 25 years.

"The banking industry as a whole has made remarkable progress in working through severe (loan) problems during a difficult economic cycle," Greenspan said. "With an improving economy, I am hopeful that the signs of some business loan growth this winter will become more evident this spring."

This process will be helped along by the package of bank regulatory changes President Clinton unveiled on March 10, Greenspan said. Those changes, which the administration put together with the cooperation of the Fed and three other bank regulatory agencies, are designed to make more credit available to small businesses.

The administration has put a major emphasis in attacking the credit crunch problem in the belief that increased bank lending will provide substantial stimulus to the economy this year while not costing taxpayers any money.

Greenspan told the committee that he believes more is needed to be done, and the regulatory agencies were completing work on proposed legislative changes. He said those changes would leave untouched the major reforms passed to prevent another savings and loan debacle. But he said he believes Congress had gone overboard in some areas, and a few mandates on bank management should be pruned back.

"In addition to cost and burden, such micromanagement has a chilling effect on bank lending attitudes, imparting a high degree of management uncertainty while the implementing rules are developed, debated and adopted," Greenspan said.

Greenspan did not specify which regulations would be targeted, but the banking industry has complained about new restraints on traditional management prerogatives such as setting executives salaries.

However, consumer groups have sounded alarms that banks, under the guise of helping small businesses get loans, were trying to undercut key consumer protections passed by Congress in recent years.

While Greenspan pointed to Fed surveys showing that banks' attitudes toward making new loans and taking risks were improving, he cautioned that there were still problems in the key area of real estate prices.

After a large run-up in prices during much of the 1980s, real estate prices in many parts of the country have fallen sharply in recent years, making bankers nervous about extending loans, Greenspan said.

"Commercial real estate prices have not stabilized enough to allow most banks to feel confident that they know what collateral is really worth," Greenspan said. "I am still concerned that a real estate market that has not found its feet is retarding the availability of small business credit."

Several congressmen told Greenspan during the hearing that they were not as optimistic that the credit crunch is easing. They said they were still hearing horror stories from businesses in their districts about the inability to get loans.

"Small business lending is nowhere near the point it should be at this time in a recovery. This is no time to let our guard down and let more jobs slip away, squeezed out by the credit crunch," said Sen. John Kerry, D-Mass.

Kerry and Small Business Committee Chairman John LaFalce, D-N.Y., are backing legislation that would create a government-sponsored agency to pool loans. Banks would make the loans to small businesses and sell them to investors, thus making more money available, similar to what is done now for home mortgages.