CHICAGO - 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.

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