WASHINGTON — Small banks will likely have to raise capital in the coming years, while bigger institutions are doing much better than a year ago, Federal Reserve Chairman Ben Bernanke said Thursday.

Regional and community banks face tough challenges, especially in residential mortgages and commercial real estate loans, Bernanke told a bankers conference in Chicago in prepared remarks a year after the Fed tested the resilience of the 19 largest U.S. banks in so-called stress tests.

Given the large number and diversity of smaller banks, Bernanke said the Fed had not even tried to conduct simultaneous stress tests of smaller banks. But the central bank has been working with them on an individual basis to assess their capital needs.

"Although the results vary considerably across institutions, prospective losses are such that many of these organizations may need additional capital over the next few years," the Fed chief said.

"Also, with credit demand tepid and the economy still under stress, profitable lending opportunities have been relatively scarce for many of these banks," he added.

Bernanke said the Fed has continued to receive numerous proposals from private equity investors to take stakes in regional and community banks. Over the past two years, the Fed has approved many of these proposals, including some that bring both new capital and management to the organization and some that provide new capital through minority investments, the Fed chairman said.

Bernanke noted how smaller banks generally have fewer alternatives than large banks for raising fresh capital and thus tend to rely on retained earnings for capital growth.

Meantime, Bernanke said that a year after the stress tests, the earnings and loan losses of the 19 biggest U.S. big banks looked "encouraging."

In the stress tests released in May 2009, the Fed designed dire economic scenarios and measured the resilience of big banks against those scenarios. The exercise has become a model for supervision, and some economists believe the tests and related capital-raising by banks played a key role in the economy's recovery.

The Fed last year concluded that Bank of America Corp., Citigroup Inc., Wells Fargo & Co., GMAC LLC, Morgan Stanley, Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc. and SunTrust Banks Inc. required around $75 billion to bolster their capital. The other nine banks were considered sound enough.

Though the biggest banks drew the most attention during the stress tests last April and May, Fed officials also worried about large regional ones, especially in the Southeast, the scene of many bank failures.

Some Fed officials have been calling for bank stress tests to be conducted periodically and for their results to be disclosed. Although Bernanke didn't embrace this view, he said the central bank was continuing to monitor large banks closely.

"Now we are working with banks to ensure they improve their risk-measurement and risk management as well as strengthen their liquidity and capital levels while also providing the credit that households and businesses need," Bernanke said.

Although bank credit remains tight, Bernanke said the strengthening economy gave reasons for some optimism.

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.