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Bernanke Says Bank Supervisors Need Delicate Balance on Lending

February 24, 2012

Feb. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said bank supervisors must strike a ‘delicate balance” between encouraging lending and avoiding a race to the bottom in loan standards.

Speaking on community banking in Arlington, Virginia, the Fed chairman said “supervisors must insist on high standards for lending, risk management, and governance.”

“At the same time, it is important for banks, for their communities, and for the national economy that banks lend to creditworthy borrowers,” Bernanke said today at a conference sponsored by the Federal Deposit Insurance Corp. “Getting that balance right is not always easy, but it is of utmost importance.”

U.S. banks face higher costs under tougher supervision including the Dodd-Frank Act. The banks have watched the gap shrink between their interest earned and interest paid out as the Fed pushed down long-term interest rates by purchasing $2.3 trillion in bonds and lengthened the average duration of the securities in its portfolio.

“Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending,” Bernanke said.

Speeding Up

The Fed’s low-rate policy is aimed at speeding up the economic recovery “which will increase loan demand and opportunities for profitable lending,” he said. “It is necessary to set the negative effects on net interest margins against the positive effects of a strengthening economic and lending environment.”

The U.S. 10-year note yielded 1.93 percent in New York at 8:32 a.m., while rates on a 30-year fixed-rate mortgage averaged 3.87 percent during the week of Feb. 9, according to Freddie Mac, the McLean, Virginia, mortgage finance company. A year ago the interest rate was about 5 percent.

Credit markets are recovering slowly, and mortgage delinquency rates are declining. Consumer borrowing rose by $19.3 billion to $2.5 trillion in December. That followed a $20.4 billion advance the prior month. The back-to-back increase at the end of 2011 was the biggest since the rise from October until November 2001.

Mortgage delinquencies declined to 8 percent of total residential loans outstanding in the third quarter compared with 9.13 percent in the same quarter a year earlier.

Bernanke said capital ratios are improving at community banks, while provisions for loan losses are decreasing. He said that the Fed is trying to adjust both examinations and regulation to community banks.

Bernanke, speaking last week at a homebuilders convention in Orlando, Florida, said credit is “too tight” for the U.S. housing market, impeding economic growth.

“The pendulum has probably swung too far in the other direction,” Bernanke said last week. “Conditions are still too tight for the health of both the financial system, for the construction industry and for our economy.”

--Editors: James Tyson, Kevin Costelloe

To contact the reporters on this story: Craig Torres in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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