The Associated Press

WASHINGTON - The U.S. banking system weathered the last recession well and is now in good shape to provide the credit needed for an expanding economy, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan told a convention of the Independent Community Bankers of America that problems banks experienced from bad loans in the last recession were mild compared with previous downturns. As a result, he said, the banking industry was "strong and well-positioned to meet customer needs for credit and other financial services."

Speaking by satellite to the bankers' meeting in San Diego, Greenspan said that during the past three years the banking industry has enjoyed an extended string of high and often record quarterly earnings and a robust growth in assets.

He said that problem loans have been declining and the size and number of bank failures over the last few years has been "exceptionally small."

Greenspan said that while the demand on banks to make business loans has been weak since the recession and the past two years of sluggish economic growth, banks have continued to benefit from strong demand for household loans - including home mortgage loans - reflecting the booming housing market.

Greenspan predicted that the period of weak demand for business loans should be coming to an end. "As economic activity continues to grow and businesses become more confident about their customers' demands, business loan demand should increase," Greenspan said.

He predicted that both large and small banks will need to look beyond their core depositor base to fund rising loan demands, and he also forecast that the trend toward mergers of both large and small banks would continue in coming years.

He said the spate of banking mergers the country has witnessed has been driven by a variety of factors, from the relaxation of government restrictions on interstate banking to increased global competition in the financial services industry.

Greenspan said that even with the consolidation, local competition among banks has increased because many of the mergers have involved banking companies expanding their geographic reach into new markets.