Fed: Community Banks In Good Health

The rapid growth in commercial real-estate loans made by community banks bears watching, even as these mostly smaller, local banks remain in good overall financial health, Federal Reserve Chairman Ben Bernanke warned Wednesday.

"In most local markets, commercial real-estate loans have performed well," Bernanke said. "Our examiners tell us that lending standards are generally sound" and are not comparable to the lax standards that contributed to the savings and loan crisis two decades ago, he said.

"However, more recently, there have been signs of some easing of underwriting standards," Bernanke said in a speech to the Independent Community Bankers of America meeting in Las Vegas.

The growth of commercial real-estate loans "raises the possibility that risk-management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades in oversight," he said.

A copy of Bernanke's remarks was distributed in Washington.

Bernanke said that in recent years community banks have become more focused on commercial real-estate lending, "leading to a significant shift in the balance sheet and risk profiles of growing numbers of banks."

Federal banking agencies have recently proposed guidance to help focus bank examiners' attention on commercial real-estate loans that could be particularly vulnerable if market conditions change, Bernanke said.

Those potentially vulnerable loans are dependent primarily on the sale, lease or refinancing of commercial property as the source of loan repayment, he said.

Bernanke did not discuss the future course of interest rates or the state of the economy in his speech or in a brief question-and-answer period afterward.

Responding to a question, Bernanke raised concerns about a legal loophole that lets companies own a certain breed of banks, called industrial loan companies. Some in Congress are interested in closing this loophole. Wal-Mart Stores Inc. is seeking to use this provision to operate such a bank in Utah.

"Congress had made clear that it has affirmed the principle of keeping banking and commerce separate," Bernanke said. "This loophole ... circumvents that principle. If Congress wants to revisit banking and commerce, that's their prerogative but it doesn't seem a good approach to allow a loophole in which that distinction breaks down."

The Fed chief's first meeting to examine interest rates is March 27-28. Many economists believe the Fed will boost short-term interest rates by one-quarter percentage point to keep inflation and the economy on an even keel. The Fed has been tightening credit for nearly two years.

Thus far, community banks appear to be doing a good job of managing their risk in an environment of rising interest rates, Bernanke said. Banks normally borrow money at short-term rates and lend out the money at longer-term rates.

Bernanke took the helm of the Fed on Feb. 1. He succeeded Alan Greenspan, who retired after 18-plus years running the central bank.

The number of community banks has dropped from more than 10,000 in 1994 to about 7,200 in 2005. Most of this consolidation is a result of mergers, Bernanke said.

Still, these banks play an important role in providing services to their customers and contributing to economic growth both locally and nationally, he said.

"Community banks are generally doing quite well, and I expect that good performance to continue," the Fed chief said. But they also face challenges, he added. "Neither bankers nor their supervisors should become complacent," he said.
By Jeannine Aversa