By Yali N’Diaye

WASHINGTON (MNI) – The decline in loan outstanding remains “of
great concern” but Federal Reserve Governor Elizabeth Duke expressed
optimism Wednesday that the trend will begin to reverse later this year,
partly in response to improved economic conditions.

“Improvements in a number of the conditions that depressed lending
in 2009,” Duke said, “lead me to be somewhat optimistic that we will
begin to see an increase in bank loans later this year.”

On the demand side, Duke noted in prepared remarks for the
fifty-third Annual Western Independent Bankers Conference in Scottsdale,
Arizona, that there is in fact less demand for credit from “sound
firms.”

Overall, the central banker deemed the banking sector as still
“weak,” with commercial real estate the source of most stress for the
majority of community banks.

That said, although some banks continue to face questions about
their capital adequacy, she noted that most community banks are
fundamentally sound and “will remain so” going forward.

There is a need, however, to address barriers to lending and in
that regard, and Duke said the Treasury’s proposal to create a $30
billion Small Business Lending Fund using TARP money “could stimulate
lending.”

Duke also urged banks to adopt a “balanced” approach in their
decision making process toward credit that remain s”restricted” for
small businesses in general.

That especially applies to commercial real-estate loans, a major
issue for community banks, forced to expense large provisions.

In fact, Duke expects the rate of bank failures “to remain elevated
for some time,” noting “significant delinquencies in their loan
portfolios.”

Last year, “Community bank losses were driven primarily by large
loan loss provision expenses, as well as a decline in net interest
margins related in part to a substantial increase in nonperforming
assets,” Duke said.

However, “There are signs that these problems might be reaching a
plateau in some loan categories,” she said.

Still, those problem loans are affecting banks’ balance sheets, and
their ability to give credit, contributing to the decline in loan
outstanding.

“Some observers attribute this decline in loans outstanding to
overzealous bank examiners, but I believe the causes are numerous and
more complicated,’ Duke commented.

But “Regardless of the cause, the decline is of great concern and
we must work together to reverse the trend.”

“The reduction in the availability of credit, however, is not the
whole story,” Duke said. “There is also less demand for credit by sound
firms.”

However, improving economic conditions should help on both the
demand and supply sides, she said.

“Economic conditions, the most important determinant of the demand
for and availability of small business lending, have improved
considerably since the early and middle part of last year,” she said.

“In response, bank attitudes toward lending, including small
business lending, may be shifting,” she concluded, expecting increased
lending “later this year.”

And going forward, Duke said the central bank will play its part in
improving the lending flow and “will continue to work to strengthen the
economy.”

Furthermore, the Fed will “ensure that our supervision and
examination policies do not inadvertently impede sound lending by
community banks.”

On the supervision issue in articular, Duke said “it would be a
mistake to focus Fed supervision on only the largest companies.”

** Market News International Washington Bureau: 202-371-2121 **

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