Bernanke says community banks have strengthened

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke said Thursday that the health of the nation's community banks has strengthened, despite what he described as a frustratingly slow economic recovery.

In remarks to a conference on community banking, Bernanke said profits at smaller banks have been rising for the past several quarters. He also said the quality of the loans on their books has stopped deteriorating, although the proportion of bad loans remains high.

"Measures of the financial conditions of banks appear to have strengthened somewhat, suggesting that, for the most part, the industry is meeting its challenges," Bernanke said.

He said that the hundreds of community banks, those with assets below $10 billion, have also seen their capital reserves against future loses increase, in part because they can more easily raise capital.

"A common complaint on the part of some community bakers is that very low interest rates hurt their profitability by squeezing net interest margins," Bernanke said, referring to the difference between what banks can earn by collecting interest on loans and what they have to pay to depositors and other sources for the money to make those loans.

Bernanke defended the Fed's decisions to keep interest rates at record-low levels. While low rates have cut into bank profits, they have also boosted the economy. And a faster growing economy ultimately helps bank profits, Bernanke said.

Bernanke has made the same argument in defending the Fed against criticism that's its policy of keeping interest rates low was hurting savers on fixed incomes.

In his appearance, Bernanke made no comments to signal where the Fed may be headed in the future on interest rates. At its January meeting, the central bank signaled that it planned to keep rates at record lows until at least late 2014.

Bernanke spoke at a conference examining the changing role of community banks. It was sponsored by the Federal Deposit Insurance Corp., the lead federal regulator for many community banks.

Acting FDIC Chairman Martin J. Gruenberg told the conference that the FDIC was launching a yearlong effort aimed at examining how community banks can best adapt to changing financial market conditions.

Gruenberg said community banks helped fill a lending void by providing loans in rural communities, small towns and inner-city neighborhoods.

"Given the labor intensive, highly customized nature of many small business loans, it is not clear that large institutions would easily fill this critical need if community banks were not there," Gruenberg said.