Federal Reserve chairman Ben Bernanke told attendees of the 48th Annual Conference on Bank Structure and Competition in Chicago on Thursday that since the financial crisis, “banks have made considerable progress in repairing their balance sheets and building capital.”
Bernanke said risk-based capital and leverage ratios for banks of all sizes have “improved materially and are significantly above their previous highs,” according to a transcript from the Fed’s website. “Importantly, the 19 largest banking institutions that participated in the 2009 stress tests … have considerably more and better-quality capital than a few years ago.”
However, the Fed chairman said residential mortgage lending has been “particularly sluggish.”
“Tight lending standards and terms remain especially evident,” he said. “To be sure, a return to pre-crisis lending standards for residential mortgages wouldn’t be appropriate; however, current standards may be limiting or preventing lending to many creditworthy borrowers.”
Small-business owners, he added, who in the past might have tapped into the equity in their homes or used their homes as collateral for small-business loans, also have found “conditions challenging in recent years.” The stock of small loans to businesses on bank balance sheets at the end of last year was more than 15% below its peak in 2008, Bernanke noted.
“Responses to the monthly National Federation of Independent Business survey suggest some modest improvement in the small business sector: The share of respondents reporting a need for credit has moved up from lows of recent years, and the net share of respondents who say that credit is more difficult to obtain than it was three months ago is notably below its peak in 2009.
He said the Federal Reserve was “keenly interested” in understanding how shifts in loan supply, loan demand and borrower quality may be affecting lending and, by extension, the broader economy.
“Of course, sorting out the relative effect of changes in loan demand from the effect of changes in loan supply can be quite difficult because they can be influenced by the same factors. For example, a shift in the economic outlook can affect both the willingness of banks to lend and the desire and ability of firms and households to borrow.”
Despite the relatively upbeat tone of the speech on the state of the banking industry overall, Beranake concluded that “nonetheless, banks still have more to do to restore their health and adapt to the post-crisis regulatory and economic environment. As the recovery gains greater traction, increasing both the demand for credit and the creditworthiness of potential borrowers, a financially stronger banking system will be well positioned to expand its lending. Improving credit conditions will in turn help create a more robust economy.”