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.

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.

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.

Federal reserve Ben Bernanke