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Banking

Banking Agencies Urge Responsible Lending

Bank Lending by community banks is an important piece of the economic recovery, but it must be done in a way that "avoids past mistakes and does not create new ones," said Kevin Bertsch, the associate director of the Federal Reserve's division of banking supervision and regulation.

Bertsch and officials from other regulatory agencies testified at an August 16, 2011, field hearing in Newnan, Georgia, and addressed concerns that overly conservative bank examinations are making it difficult for community banks to lend. They also discussed recent community bank performance amid still-tough economic conditions.

Community banks under strains
Although community banks have seen stronger earnings and improved asset quality in recent quarters, their performance is still weak by historical standards, noted Bertsch. Many of the challenges facing community banks stem from their exposure to construction and commercial real estate loans, he said. This is particularly true for the southeastern region, which is responsible for nearly 40 percent of the 388 bank failures nationally since 2007. Community banks in Georgia were especially hard hit. According to Bertsch, 41 percent of the state's insured commercial banks were unprofitable through the second quarter of 2011, compared to 15 percent of banks nationwide.

Pointing to ongoing questions about whether examiners have been overly restrictive of bank's activities, Bertsch laid out several steps the Fed has taken in the past several years to ensure "a balanced approach to supervision."

The Fed, along with other federal banking regulatory agencies, has issued examination guidance stressing the importance of taking a balanced approach. For instance, in February 2010 the Fed and other regulators issued a joint statement on lending to creditworthy small businesses, he noted. The Fed has also put in place training programs for examiners and outreach programs for bankers emphasizing the importance of sound lending practices.

Ensuring consistent supervision
Additionally, all examination findings are reviewed before they are finalized, and management teams vet the findings to ensure that issues are addressed consistently, among other things. Board staff also conduct more specific reviews, such as one recently that focused on commercial real estate loan-classification practices. According to Bertsch, the board's monitoring efforts so far "suggest that Federal Reserve examiners are following established guidance in evaluating supervised institutions."

August 31, 2011

 

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