The foreign debt crisis of the past several months has created a paradox for bankers and for policy makers who worry about the health of the world banking system:

Should banks step up their overseas lending to avoid undermining even further the billions of dollars that they already have at risk? Or should they pull out as quickly as possible from the Third World lending that now seems so risky?

Congress is moving to tighten up on foreign lending by U.S. banks in return for approving increased funding for the International Monetary Fund--the Washington-based institution that lends money to nations in financial trouble, provided they take steps to cut back their dependence on foreign cash. But while legislators work to make it more difficult and less profitable for U.S. banks to lend to the Third World, many monetary officials here and elsewhere in the industrialized world would be delighted if commercial banks started to lend more freely.

While they wish banks had not lent so much in the past, many officials now fear that the surest way to a wholesale banking collapse would be for banks to stop lending too abruptly. This would make it harder for borrowing nations to keep up their debt payments and would force them into still stiffer retrenchment.

Congress, on the other hand, does not want to bail out big banks or foreign nations at a time of a squeeze on domestic spending. Treasury Secretary Donald T. Regan said this week that it was "inevitable that the Congress would demand a price for increased IMF support and the price is that they want sensible lending, not necessarily less lending, and they want it more . . . under the supervision of the regulators."

But he and some other officials doubt that stiffer regulations will have much impact on the banks, at least in the short run. The crisis of the last few months has already frightened bankers so much that they have reduced their lending wherever possible, as Brazil has found in recent weeks. With its bankers unwilling to put up all the short-term money that they have promised, Brazil has been suffering an acute shortage of cash. At a creditors meeting in London this week, the central bank began a push for more.

In an indication of how different the interests of smaller banks are from those of the big money-center institutions in New York, Chicago and elsewhere, Brazil is being helped by its major creditors--who recognize that they cannot afford to pull out--to push for more money from the smaller U.S. banks and some foreign banks.

Federal Reserve and Bank of England officials present at the meetings undoubtedly hope that the commercial banks will manage to come up with the needed cash in this and other cases.

One reason is that governments and international agencies cannot fill the gap that would be left if banks try to pull out from overseas lending. Although industrialized nations, led by the United States, stepped in swiftly and effectively with emergency cash for Mexico and, later, Brazil, they have not been able to agree among themselves on a broader or longer-term approach.

In central bank meetings at the Bank for International Settlements in Basel, Switzerland, one senior U.S. official said, "It's a zoo." Europeans have resisted U.S. pressure to do more to help out the Latin American countries to which U.S. banks have lent heavily, as they complain that the U.S. has not paid enough attention to the debt problems in Eastern Europe, where European banks have more at stake, he said.

The IMF, for its part, has coordinated a series of financial rescue packages between borrowing nations and commercial banks. But even with the proposed increase in resources, the agency itself does not have nearly enough cash to take over private bank debts, or to lend all the new money that Brazil and others will likely need. What the IMF can provide is a "comfort blanket" for bankers, U.S. Ambassador to Brazil Langhorne A. Motley said, by insisting that borrowers tighten up their economic policies and by monitoring their progress.

So far the "comfort blanket" has worked.

But even so, bankers and officials agree that the surge in foreign lending during the 1970s and early 1980s will not return. During that period "70 banks a year were joining" the international lending game, commented Geoffrey Bell, senior adviser to J.H. Shroder of New York and member of the Group of 30, an international group that studies the functioning of the world economic system. Many of the newcomers, particularly smaller banks, did not know much about the nations to which they were lending nor, as it turned out later, about their chances of repayment.

Now that they have found out the hard way, many want out, or at least to be less in. The chairman of Riggs National Corp., for example, told shareholders last week that the Washington bank planned to pull back from foreign lending in the future. Discussing Brazil's debt crisis last month, U.S. Ambassador Motley said "the first hurdle for the American banking system" is for regional and smaller banks to decide "do they want to go back lending overseas?"

While little banks entered the international market with gusto, they often did not have much control over what happened after they had made their initial commitments. Regional and local banks have been excluded from the creditors' groups that have negotiated with Brazil, Mexico and others about stretching out loan repayments, but they are still pressured to go along with whatever deal is worked out, one local banker complained recently. A Treasury official commented that if these banks are pushed to put up more money, "you'll be able to hear their screams from here."

Bell now foresees a continued "massive retreat from international lending." In Brazil, one economist commented, "all those fellows in charge now, those bankers will never return to confidence, so it will take a whole generation to change" the present mood of retrenchment. Another said "once crises happen, they have everlasting implications . . . once bankers face the possiblity that they won't get their money back, they are traumatized."

Banking supervisors may hope that the trauma teaches some useful lessons about the risks of international lending.

But for Brazil and other debtor nations, such a trauma spells the end, for the time being, to rapid growth and development. Naturally enough, these nations would like to push others to help fill the gap that they expect to be left by commercial banks. Brazilian central bank governor Carlos Langoni, part of an economics team that has instituted a strict austerity program in return for IMF help, predicted recently that the next decade will see "a gradual decline in commercial bank lending to the Third World and a gradual increase" in lending by multilateral agencies such as the IMF. But he added, "it's very important that governments in developed countries help. . . . The world probably needs new institutions . . . to help countries in crisis."

Governments in the industrialized world are reluctant either to take over the debts of unhappy bankers or to force the banks to go on lending when they do not want to. "Banks would love to have the regulators tell them they have to" go on lending, a U.S. Treasury official commented, as this would remove responsiblity from the banks themselves for their credit decisions.

But he added, that the regulators would steer clear of such a move.

Regan, commenting on proposals that government should take over developing country debts, said "these are ideas that many people--influenced I think by their own expansive ego and not necessarily their own expansive pocketbook--think that others should provide. I don't think the governments of the world are in a mind to do this sort of thing . . . I think that between the private sector and the recognized agencies, the IMF particularly, these situations can be handled. But what it means is that politically, they are going to have to rein in some of the ambitions that they had" for growth and development.