Bernanke tells community banks to bite down on low interest rates

Community banks need something the Federal Reserve is unwilling to provide at this time, reports MarketWatch. The Fed is maintaining its theory that it must keep interest rates low to facilitate economic recovery. However, small community banks depend upon higher interest rates more than any other financial institution so they can remain profitable.

Tough love for community banks

Federal Reserve Chairman Ben Bernanke told community bankers at a Federal Deposit Insurance Corp. conference in Arlington, Va., that lending must be strengthened if the U.S. is to continue its economic recovery.

“A common complaint on the part of some community bankers is that very low interest rates hurt their profitability by squeezing net interest margins,” he said. “It is necessary to set the negative effects on net interest margins against the positive effects of a strengthening economic and lending environment.”

As to whether the Federal Reserve has been too tough on community banks by placing undue restrictions on their ability to lend, Bernanke was nearly apologetic.

“In particular, we recognize that new regulations and supervisory requirements may impose disproportionate costs on community banks, which have smaller staffs and less-elaborate information systems than larger banking organizations,” he said.

The need for high lending standards

Protecting the most banks possible from the threat of a “race to the bottom,” Bernanke argued that Federal Reserve supervisors must err on the side of maintaining higher lending standards. Without that, future problems will arise that will cause problems all over again. Small community banks are left with the recourse of appealing supervisory decisions set down by the Fed, he noted.

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Current capital requirements for community banks are necessary to aid in the nation’s overall economic recovery, reiterated FDIC director Thomas Curry.

“Well capitalized, well managed institutions are positioned to ride out the storm,” Curry told the Arlington gathering.

Curry also noted that three-quarters of the nearly 400 U.S. banks that have failed were community banks.

Be diverse – be a land bank

Rather than centering too much risk on a single category of lending, Bernanke urged community banks to spread investments around. Taking the performance of existing bank assets into account should be a given. As the overall economy improves, delinquencies on the local level should decline, he noted.

Converting foreclosed homes into rental units is one way the Federal Reserve is looking to diversify in order to speed recovery. As a part of this process, Bernanke proposed more community banks become “land banks” that purchase and sell real estate. Some of these banks already exist, but few have the resources to keep pace with the flood of low-value properties across the country.

How Bernanke’s land bank strategy will affect the number of distressed homeowners with “underwater” mortgages remains to be seen. Considering the lack of equity such consumers have in their homes, refinancing has proven difficult.

Rep. James Lankford questions Bernanke on community bank challenges

Sources

CNBC

Marketwatch

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