CHARLOTTE, N.C. — Boston Federal Reserve Bank president Eric Rosengren Friday expressed concern about the duration of the “illiquidity” in financial markets and warned that as banks repair their balance sheets by restraining lending, economic weakness is apt to spread beyond the housing finance sector.

Rosengren observed that banks have increased capital but suggested that they may still not have enough capital to absorb further credit losses. And he said that smaller banks, which have thus far been little affected by losses on complex, subprime mortgage-related credit instruments, could suffer if declines in residential and commercial real estate prices worsen.

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