UPDATE 2-Fed’s Bernanke sees reasons for optimism on lending

(Recasts, adds background)

By Ann Saphir

CHICAGO, May 6 (BestGrowthStock) – U.S. bank lending remains tight
but there are reasons for optimism as economic activity has
continued to strengthen and banks may be changing their
attitudes toward lending, Federal Reserve Chairman Ben Bernanke
said on Thursday.

Senior loan officers expect at least a small reduction in
banks’ troubled loans — with the exception of commercial real
estate — over the coming year, Bernanke told the Federal
Reserve Bank of Chicago’s annual bank structure and competition
conference.

“As a result, bank attitudes toward lending may be
shifting,” he said.

For now, however, “bank lending continues to contract and
terms and conditions remain tight,” Bernanke said, adding that
loan losses at regional and community institutions are likely
to remain elevated this year.

“Restoring the flow of credit through the banking system
remains a central objective of the Federal Reserve,” he said,
adding that the Fed has been taking steps to ensure supervisory
actions don’t “inadvertently impede lending.”

Bernanke did not address the outlook for monetary policy,
and on the economy he said only that it was “still under
stress”.

Instead, he spent much of his speech discussing the
publicly disclosed stress tests the Fed and other bank
regulators conducted last year across the 19 largest U.S.
financial firms.

While some observers warned last year that “public
disclosure of the results might backfire,” Bernanke said “the
public disclosure was an important reason for its success.”

The stress test exercise helped reduce uncertainty about
losses banks were facing, encouraging private capital back into
the banks, he said.

The Fed is continuing to examine options for increasing the
information that supervisors make public, Bernanke said.

“In proper context, more information about the status of
both the individual banks and of the banking system as a whole
should be confidence-enhancing,” Bernanke said.

While Bernanke wants to lead the Fed in a more transparent
direction, the central bank has tried to draw a line on letting
in too much light on its emergency lending activities and
monetary policy. The Senate is expected to vote on a regulatory
overhaul bill amendment on Thursday that would subject the Fed
to broader Congressional audits. For more, see [ID:nN06262291]

The 2009 stress tests were a unique exercise in that they
took a “horizontal” approach and tested how the banks would
fare under uniform assumptions of economic conditions and loss
rates.

“Last year’s stress assessment was a one-time event in the
sense that circumstances may not again call for a simultaneous
evaluation of institutions holding two-thirds of the banking
systems assets,” Bernanke said.

Beginning next year, the Fed will formalize stress tests,
conducting them periodically, though the exact frequency — and
potential stress factors — have not yet been determined. For
more see [ID:nN2756904].

Fed Governor Daniel Tarullo and Kansas City Federal Reserve
Bank President Thomas Hoenig have suggested results should be
made public.

The Fed is still monitoring credit losses and earnings at
the 19 stress-tested institutions to compare the outcomes with
the supervisory estimates made a year ago under the more
adverse scenario, Bernanke said.

“It is not possible to say precisely at this point whether
the assessed banks are performing better or worse than
estimated,” he said.

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UPDATE 2-Fed’s Bernanke sees reasons for optimism on lending