WASHINGTON — Federal Reserve Chairman Alan Greenspan said Friday that commercial banks and banking regulators need to rely more on the emerging field of risk management to control loan defaults during periods of economic weakness.

        Mr. Greenspan said it was only human nature for banks to get overconfident about their lending practices during boom times and then to sharply retreat from making loans when the economy weakens.

        “To the majority of banks, the environment of contagious optimism makes more and more proposals seem bankable” during times of prosperity, Mr. Greenspan said. And, when the economy begins to weaken, banks and their regulators will overreact, he said.

        In response to questions, Mr. Greenspan told his audience at a banking conference in Chicago that the long-term outlook for business investment is “increasingly, persuasively good” even though the short-term prospects for a rebound in capital spending are still “rather mixed.”

        Mr. Greenspan said the huge increases in Americans' productivity in recent months — including an 8.6 percent surge in the first quarter — overstated gains in this important measure of living standards. But he said he is convinced that worker productivity has improved significantly since 1995 after more than two decades of lackluster gains.

        Mr. Greenspan said it was natural for bankers to grow more cautious in their lending practices during bad times.

        To help moderate this boom-bust cycle of banking, Mr. Greenspan said banks and their regulators should rely more on risk management in which banks use sophisticated computer models to help them assess the relative risks of their loans.

        This is especially important, he said, because in the last 20 years the average quality of commercial banks' loan portfolios has declined as high-quality borrowers have been able to raise much of the money they need by issuing their own bonds.

        For large banks, Mr. Greenspan said, “The loss of their highest-quality borrowers has elevated the aggregate risks in their portfolios.”

        Because of this, he said, the biggest banks have been pioneers in the new field of employing various risk-management techniques to constantly monitor the loans they are making.

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