Banking

Banking conditions have improved significantly since the financial crisis, but banks still face a number of challenges, said Federal Reserve Chairman Ben Bernanke in a May 10 speech.

In remarks delivered via satellite to the Chicago Fed's annual banking conference, the chairman highlighted the "considerable progress" banks have made in strengthening their balance sheets and building capital. Results from the latest supervisory stress tests—formally called the Comprehensive Capital Analysis and Review (CCAR)—highlight the extent to which banks have shored up their capital levels. The 19 banks that participated in the stress-testing process have increased their Tier 1 capital by more than $300 billion since 2009 and "would likely have sufficient capital to withstand a period of intense economic and financial stress," Bernanke said.

New rules costly, yet critical
Despite recent progress, however, banks are struggling to expand their revenues amid the sluggish economy, changes in market conditions, and more stringent financial regulations. While the new rules impose "significant burdens" on banks, they are "critical to safeguard the stability of the financial system" and to prevent a repeat of the crisis, Bernanke said. Regulators are taking steps to minimize any adverse effects the new rules may have on the supply of credit. For instance, many of them are being phased in gradually, and regulators have consulted extensively with various stakeholders in the process of writing and implementing new rules. The chairman also emphasized that many of the regulations are not geared toward community banks but instead are "designed primarily to constrain risks at larger institutions."

Credit conditions improve, but mortgage lending still tight
Improved banking and financial market conditions have contributed to easier credit conditions for many businesses and consumers. However, access to credit is still restrained in some sectors and for some types of borrowers, Bernanke noted. The Fed's Senior Loan Officer Opinion Survey provides further details on the supply of and demand for loans. The April 2012 survey indicated easing standards for commercial and industrial loans, but mortgage lending remained sluggish. While a return to precrisis lending standards "wouldn't be appropriate," current standards may be locking creditworthy buyers out of the market, he said.

Citing the results of a special question in the most recent survey, the chairman noted that respondents indicated that they were currently less likely to originate mortgages eligible for purchase by the government-sponsored enterprises (GSEs) than they were in 2006, even to borrowers with good credit histories and a 20 percent down payment. Tight mortgage lending conditions are unlikely to be resolved overnight, Bernanke noted, pointing to such factors as the sluggish recovery in the housing market and economy, uncertainty about the future role of the GSEs, and lenders' cautious attitudes.

However, as the recovery gains steam, "increasing both demand for credit and the creditworthiness of potential borrowers, a financially stronger banking system will be well positioned to expand its lending," he said. These factors, in turn, will "help create a more robust economy."

May 24, 2012