Bernanke Warns Of Potential Problems With Community Banks

Federal Reserve Chairman Ben Bernanke, speaking on Thursday via teleconference to a Chicago bankers' conference, took an uncharacteristic swipe at community banks, suggesting that those institutions might not be as sure-footed as their balance sheets would have them appear.

While standard measures of community banks' profitability, such as return on equity and assets, improved last year, as was also true at larger institutions, most of the gains were due to reductions in loan loss provisions rather than to more sustainable sources of profit, such as expanded lending, Bernanke said.

The comment stood out in a speech otherwise focused on the country's financial system being in recovery. While noting that banks still have more to do to restore their health and adapt to the post-crisis regulatory and economic environment, the Fed chairman pointed out how stabilization in non-mortgage lending and rising asset prices meant the business landscape for banks had improved significantly in the past few years.

Elsewhere in the speech, Bernanke noted how bank lending standards had recently been loosened, according to a survey conducted by the Fed. He also emphasized how regulatory action had been balanced to ensure additional reporting requirements imposed in the wave of the financial crisis were not strangling lending activity.

Bernanke explained that the Fed's emphasis on using bank capital levels as a measure of financial health arose from the fact capital ratios are a definable, easily understandable number and something that helps restore confidence in institutions.

U.S. equity markets rose at the beginning of Bernanke's speech, which coincided with the opening bell in New York. It is unlikely, however, that any of his statements were truly market-moving. The benchmark S&P 500 Index of U.S. stocks recently traded up 0.30 percent to 1358.70.