Federal Reserve Governor Elizabeth Duke said Tuesday that a "weak" economy is curbing loan demand and in turn bank lending, but said that banks should be able to expand credit once the economy gains momentum.
Duke did not say when that might be, nor did she comment on monetary policy less than a week after voting to continue the Fed's aggressive stimulus measures at a meeting of the Fed's policymaking Federal Open Market Committee.
She said banks should be in a good position to expand lending when the time comes because their "credit metrics" have improved.
Most of Duke's remarks were related to the regulatory concerns of community bankers, and she tried to reassure them that the Fed and other supervisory agents will do their best to lighten the regulatory load imposed by the Dodd-Frank legislation. That law is aimed primarily at large, systemically important institutions, she said.
She acknowledged that "the regulatory environment is challenging and the economy remains weak in many areas."
Expounding on that theme, Duke said she has heard a lot from community bankers who "paint a picture so bleak that they see only personal retirement or sale of the bank as viable strategies."
"I completely understand how tiring it is to fight a financial crisis and survive a deep recession followed by a weak recovery only to confront what seems to be a tsunami of new regulations," she said.
But Duke endeavored to be upbeat.
"Credit metrics are now improving in most banks as problem loans have been addressed and resolved and new credit underwriting has been quite restrictive for a number of years," she said.
"Deposit growth has outpaced loan demand and reliance on wholesale funding has been reduced," she noted. "Capital positions are stronger."
Duke said "the interest margin pressure banks face today is partly due to low interest rates and partly due to weak loan demand, both of which are consequences of a sluggish economy."
However, "as the economic recovery gains momentum, however," she said "both of these conditions should reverse and give bankers the opportunity to deploy the liquidity and capital they have amassed to the benefit of their shareholders and their local economies."
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