Banks should make loans to sound borrowers

BanksRegulators must do all they can to help banks make loans to creditworthy borrowers, especially small businesses, a development that’s critical to strengthening the economic recovery, Federal Reserve Chairman Ben Bernanke said Thursday.

It’s a delicate dance for the Fed and other banking regulators. As regulators encourage banks to make loans to sound borrowers, they are also working to make sure banks get back on firmer footing after suffering through the worst financial and economic crises since the 1930s.

“Our message is a simple one: institutions should strive to meet the needs of creditworthy borrowers, and the supervisory agencies should do all they can to help, not hinder, those efforts,” Bernanke said in prepared remarks to a conference on banking in Chicago.

“We are also supporting efforts to work with troubled borrowers to bring them back into good standing,” he added.

Getting credit to flow more normally again to both people and businesses is an important ingredient to helping the fledging economic recovery gain momentum. Improvements have been made but problems still remain.

Ordinary Americans ? trying to pare their debt and rebuild their finances ? have shown a weak appetite to take out new loans.

However, many lawmakers on Capitol Hill have complained about small businesses wanting to take out loans but have trouble getting them. And, that has crimped their ability to expand operations and hire. Small businesses usually help drive job creation during recoveries, but credit clogs have hurt hiring.

Bernanke said officials at regional Fed banks across the country are meeting with small business owners and community bankers to talk about the problems and how to remedy them.

Earlier this year, the Fed and other banking regulators made a joint plea to banks to work on improving lending to creditworthy small businesses. That’s an important goal for the Obama administration, too.

Even though credit remains tight, Bernanke said he sees some reasons for optimism.

“Economic activity has continued to strengthen. And, senior loan officers tell us that, at least outside of commercial real estate, they anticipate a modest reduction in their troubled loans over the coming year,” Bernanke said.

“As a result, bank attitudes toward lending may be shifting,” he said.

Last year, the Fed conducted “stress tests” on how the nations 19 largest banks would perform if economic conditions worsened. The Fed made the results public, departing from a long-held practice of keeping bank exam information confidential.

Bernanke said making the results public ended up bolstering confidence in the financial system, an important part of the healing process at the time. In light of that, Bernanke said the Fed will continue to examine options for increasing the information that bank supervisors make public.

Separately, James Bullard, president of the Federal Reserve Bank of St. Louis, in a speech Thursday said debt problems in Greece and other countries in Europe pose a risk to the U.S. economic outlook.

Bullard was among the Fed officials voting last week to leave interest rates at record lows for an “extended period” to support the U.S. economic recovery.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, in a separate remarks, indicated he is more confident that the recovery will be lasting, pointing to a rebound in consumer spending. Once the recovery is firmly entrenched, it may make sense for the Fed to start shrinking its $2.3 trillion balance sheet before it starts boosting interest rates.

Source: The Associated Press