There are reasons to hope bank lending could pick up by yearend even though failures and industry challenges will be an ongoing issue, a top Federal Reserve official said Wednesday.
Fed Gov. Elizabeth Duke, speaking at a banking conference in Arizona, said policymakers are sensitive to the challenges facing smaller banks rather than their Wall Street rivals, and want to encourage prudent lending.
"Improvements in a number of the conditions that depressed lending in 2009, however, lead me to be somewhat optimistic that we will begin to see an increase in bank loans later this year," Duke said in prepared remarks. She stressed that most of the nation's community banks are "fundamentally sound," but acknowledged that some firms are facing significant stress from problem loans, particularly in the commercial real estate sector.
Duke also referenced the continuing debate in Washington between the banking industry and its regulators over whether once-lax supervisors may now be too aggressive in forcing banks to mark down poorly performing loans. Industry groups have pushed lawmakers to press regulators such as the Fed and Federal Deposit Insurance Corp. to tamp down more-aggressive regulation.
"I think the best way to bridge the gap in perception is through well-documented facts," Duke said, suggesting regulators are searching for a middle ground that requires banks to acknowledge the difficult environment without having to reclassify loans that will eventually perform.
"The fact that the loan has a good payment history and is performing is important, but not sufficient to make the case that resources are available to keep it current in the future," she said of a frequent argument regulators hear from banks.