Marking the anniversary of the federal program that brought the big banks back to life, Ben Bernanke stresses there is more work to do.
Fed chief Ben Bernanke took a well-deserved victory lap Thursday, on the anniversary of the government-administered stress tests that helped resuscitate the biggest banks.
“Last year’s stress assessment was a watershed event,” Bernanke said Thursday in a speech at a Chicago Fed banking conference. “It helped restore confidence in the banking system and broader financial system, thereby contributing to the economy’s recovery.”
The stress tests enabled banks led by Bank of America and Wells Fargo to raise billions of dollars from shareholders. It also helped set off a yearlong rally in bank stocks. The BKX index of regional bank stocks is up 40% since the results were released.
But Bernanke acknowledged that regulators have much more work to do, at a time when small banks are under immense pressure and lending is still contracting at what Capital Economics called “an alarming pace.” There is good news, to be sure. The Fed’s senior loan officer survey showed this week that banks aren’t tightening lending standards for small businesses. That’s the first time they have held credit availability steady since mid-2007, Bernanke said.
But Capital Economics notes that the loan survey may not be the best indicator in the current environment, because it focuses on the biggest banks — the ones that were able to raise capital following the stress tests.
“We know that it is the smallest banks that are suffering the most now, particularly those more exposed to rising defaults on commercial real estate loans,” economist Paul Ashworth wrote this week in a note to clients. “Accordingly, the turnaround in lending might not be quite as dramatic as this survey suggests.
Indeed, smaller banks continue to go under at a hair-raising clip. The Federal Deposit Insurance Commission reported 23 bank failures in April, up from 19 in March. All told, 64 banks have failed this year, on top of 140 last year.
Bernanke said regulators have been trying to keep small banks lending to small businesses by stressing restraint on the part of bank examiners
“Our message is a simple one: institutions should strive to meet the needs of creditworthy borrowers, and the supervisory agencies should do all they can to help, not hinder, those efforts,” he said. “We also are supporting sensible efforts to work with troubled borrowers to bring them back into good standing.”
But in the wake of a massive credit bubble in which lenders and borrowers alike made decisions that will haunt them for years, a return to more normal lending conditions won’t come quick.