WASHINGTON - U.S. banks' have put the worst of their problems behind them, Federal Reserve Governor Susan Phillips said Tuesday.

Speaking to a meeting of the Virginia Bankers Association in White Sulphur Springs, W. Va., Ms. Phillips said nonperforming loans are beginning to decline and banks are benefiting from the widest net interest margins in many years.

"My net assessment is that while much further improvement is needed, there is a basis for believing that the industry's current problems have peaked," Ms. Phillips said.

"We can expect the number and costs of bank failures to remain high for some time," she added. "But in many respects, the broader outlook for the U.S. banking system seems brighter than it has in several years."

She warned that regulation and supervision "can be taken too far," adding that "fundamental banking reform is still needed."

Ms. Phillips also reiterated her recent comments that near- and longer-term economic prospects are encouraging, though she said she "cannot discount the risk of a temporary setback."

Lower Inflation Forecast

"quite favorable" for a further gradual reduction in the core rate of U.S. inflation.

Ms. Phillips said the "economic tea leaves so far in the second quarter seem to be consistent with continued -albeit moderate - economic growth." And she pointed to a "likelihood of a revival of the uptrend in overall household spending sometime soon" because of improved consumer confidence.

She added that while business spending may experience a modest recovery in coming months, that sector needs to be watched to see whether recovery is sustained. Ms. Phillips said the most favorable economic news is now coming from the industrial sector, while the labor market is "more mixed."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.