WASHINGTON — The nation’s community banks could play a key role in spurring an economic recovery, Federal Reserve Chairman Ben Bernanke said Friday, as he encouraged them to make loans so long as they can do so prudently and “not to let fear drive” their decisions.
Fed bank examiners have been directed “to encourage banks to make economically viable loans,” Bernanke told the Independent Community Bankers of America in Phoenix, “provided such lending is based on realistic asset valuations and a balanced assessment” of borrowers’ ability to repay the loans.
Many of the nation’s largest banks have pulled back on lending following massive losses.
Seventeen banks have failed so far this year.
Smaller local banks have tended to be less exposed to the complicated securities that have dragged down their larger competitors.
“If community banks are prudent but opportunistic in extending credit to strong borrowers, they will help the economy recover while benefiting from that recovery themselves,” Bernanke said.
He also said that “in some instances, community banks are able to step in at crucial moments when local businesses or consumers have been unable to find credit elsewhere.”
Some analysts have cautioned that small banks might also encounter a new wave of losses soon — particularly on commercial real estate and development loans.
Nonetheless, they might find now to be a good time to gain new customers, the Fed chairman argued, as many debt markets have all but shut down.
Bernanke expressed sympathy for bankers who feel that they have received “mixed messages” from the government, including orders to continue lending at the same time they are ordered to act cautiously to remain well capitalized.
