Bernanke says community firms must stay viable

Federal Reserve Chairman Ben Bernanke on Wednesday urged financial institutions that specialize in community development and banking to the poor to take steps to ensure they emerge from the financial crisis stronger.

The Fed chief, in prepared remarks to a financial literacy conference here, spoke hours before President Barack Obama planned to unveil a revamp of financial regulations intended to better safeguard against the housing, credit and financial debacles that have contributed to the longest U.S. recession since World War II.

Nationwide, there are more than 1,000 certified so-called community development financial institutions that collectively hold $25 billion in assets. They may be banks, credit unions, nonbank lenders or venture funds and they strive to provide affordable financial services to people and communities who traditionally lack them.

Bernanke urged the community development institutions to take steps “to correct weaknesses that have emerged” in their business model, suggesting they broaden and diversify their funding bases.

“Economic recovery, like economic development, is a bottom-up as well as a top-down process,” he said.

While many community development institutions have continued to hold up “relatively well” despite the financial crisis, rates of delinquencies and defaults on loans have risen as economic conditions have worsened, Bernanke said.

That often is related to economic distress in the community as once-thriving businesses are forced to shut their doors, affordable rental housing complexes struggle to make payments as tenant lose jobs, and after-school youth centers can’t repay loans because their donor base has shrunk.

“As the effects of the financial crisis and the resulting economic downturn have spread, there has been increased focus on preserving the gains made in low- and moderate-income communities over recent decades,” Bernanke said. “Accomplishing that objective requires preserving the institutions that helped build these communities.”

Bernanke didn’t talk about the current state of the economy or provide clues about whether he and his colleagues would take any additional steps to shore up the economy when they meet next week.

Separately, Bernanke has been invited to testify on June 25 by a House committee investigating the government’s rescue of Bank of America Corp. and allegations that the Fed and the Treasury Department pressured the bank to move ahead with its acquisition of Merrill Lynch.

Copyright 2009 The Associated Press.