By Ian McKendry

CHICAGO (MNI) – Federal Reserve Chairman Ben Bernanke Thursday said
the banking sector has become more profitable and capital has been
boosted, but housing credit remains constrained and it will be difficult
to turn around quickly.

“Signs of improvement notwithstanding, credit conditions in some
sectors and for some types of borrowers remain tight,” Bernanke said in
a speech to bankers and academics at the annual conference on bank
structure and competition hosted by the Chicago Fed.

Bernanke noted that U.S. home mortgage credit outstanding has
contracted 13% from its peak and that “many factors suggest that this
situation will be difficult to turn around.”

He cited the Federal Reserve’s April Senior Loan Officer Opinion
Survey which found that even when accompanied by a 20% downpayment, many
banks are still less likely to lend to borrowers with GSE-eligible
credit scores than they were in 2005.

Bernanke noted that many banks have cited “put back” risk —
having to repurchase a loan if it didn’t meet certain requirements — as
a primary reason why they are still hesitant to lend.

In-turn, Bernanke said the lack of mortgage credit has impacted
small businesses which are often cited as the engines of job growth, as
entrepreneurs and small business owners who have traditionally tapped
the equity in their home for funding have been unable to borrow.

Despite a still constrained lending environment for home mortgages,
Bernanke said “the banking sector overall also has substantially
improved its liquidity position over the past few years.”

“The profitability of large banks has been edging up as credit
quality has firmed and banks have trimmed noninterest expenses,” he
added.

Bernanke noted that lending standards between 2007 and 2009
tightened beyond what a historical model would suggest, which
contributed to a “subdued pace of lending” but that as the economy has
improved, lenders risk aversion has started to recede.

He also addressed bankers concerns about regulation impacting their
ability to lend.

“Some bankers and borrowers believe that enhanced supervision and
regulation has made it more difficult for banks to expand their
lending,” Bernanke said, adding “the Federal Reserve takes seriously its
responsibility to ensure that supervisory actions to protect banks’
safety and soundness do not unintentionally constrain lending to
creditworthy borrowers, and we have taken a variety of steps to address
these concerns.”

Bernanke said the Fed has urged regulators to “promptly” upgrade
banks supervisory ratings when warranted and that some analysis has
found banks with lower supervisory ratings tend to lend less compared to
those with higher ratings.

“As the recovery gains greater traction, increasing both the demand
for credit and the creditworthiness of potential borrowers, a
financially stronger banking system will be well positioned to expand
its lending,” Bernanke said.

“Improving credit conditions will in turn help create a more robust
economy,” he added.

** MNI Chicago **

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