By Yali N’Diaye

BALTIMORE (MNI) – Noting the weakness of fundamentals, and labor
markets in particular, Federal Reserve Gov. Sarah Bloom Raskin said
Friday the “deployment of unconventional policy tools has been
completely appropriate to help promote the Federal Reserve’s statutory
mandate of maximum employment and price stability.”

“In that regard, although the pace of employment growth has picked
up in recent months and the unemployment rate has fallen some, the labor
market remains quite weak,” she said in a speech for delivery to the
Maryland Bankers Association First Friday Economic Outlook Forum.

She also said “stubbornly high” unemployment — which she qualified
as “horrifying” when it reached 10% by the end of 2009 — is keeping
pressures on banks’ profitability and credit quality.

Along with weak labor markets, Raskin stressed the “considerable
uncertainty about the health of residential and commercial real estate
markets in many parts of the country.”

In fact, “community banks’ balance sheets remain weighed down with
nonperforming real estate loans” and nonperforming asset ratios remain
high, she said in a speech that was mainly focused on community bank
examination and supervision.

Still, there are encouraging signs that community banks are faring
better in the current environment.

“While profitability remains below long-run historical norms,
returns on equity and assets have reached their highest post-crisis
levels,” Raskin said. She also noted the improving earnings trend.

So “despite the tough road that many community banks still must
navigate, there are promising signs that conditions seem to be
stabilizing,” she said.

Raskin also stressed the need for examinations that do not unduly
hinder credit to creditworthy borrowers.

“To be clear, I do not think this is occurring in any significant
way, but it is an issue that we at the Federal Reserve focus on
continually,” she said.

While credit is important to the economic recovery, Raskin stressed
that “many small businesses appear to be facing unusual obstacles in
obtaining credit,” a factor that could “be constraining the channels
through which monetary policy accommodation affects the economy.”

Raskin pointed out the concentration trend in the banking industry,
and the contrast between large commercial banks and community banks
where risks are “less dangerous.”

Certainly, they are not immune from excessive risk taking, she
said, but community banks being easier to understand and generally more
traditional in their activities, the risks they take are less dangerous
to the financial system.

“Risks at community banks tend to arise from their lending
activities, whether in the form of credit or interest rate risk, and a
lack of diversification can exacerbate these risks,” Raskin said.
“Unlike large, complex banks, community banks typically do not rely on
their investment portfolios or diversified business lines to offset low
profits.”

As a result, the examination model must differ between community
banks and large commercial banks, she concluded.

** Market News International **

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