Bernanke: How Easy Money Lending is Affecting Community Banks and the Economy

Federal Reserve Chairman Ben Bernanke spoke on Thursday to the Future of Community Banking Conference, in Arlington, Virginia, on the role of community banks in a challenging economy. The Chairman addressed in his speech the Fed’s easy money (low interest) polices over which bankers have expressed many concerns about their profit margins being eroded.

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“A common complaint on the part of some community bankers is that very low interest rates hurt their profitability by squeezing net interest margins,” Bernanke said. “Since the onset of the financial crisis, the Federal Reserve’s monetary policy has been accommodative, as you know. In particular, the federal funds target rate, which stood at 5-1/4 percent in mid-2007, was lowered to a range of 0 to 1/4 percent by the end of 2008 and has since remained at that level.

“Although these policies do not seem to have led to much change in aggregate measures of net interest margins,” he added, “at least thus far, we continue to hear that many banks are feeling pressures from this source.”

Aside from fees they charge, banks earn their revenue from interest on ‘safe assets’ like Treasury bills, and from payments on loans they issue. During unhealthy economic times, demand for loans is weak, and banks tend to rely much more on the former, which pay lower returns than the more risky loans. Additionally, the interest rates they pay for deposits are not much below the returns received on safe assets, which constitutes the ‘squeeze’ on profit margins.

Bernanke reminded the audience that the Fed’s current liquidity accommodation and the resultant low interest rates are designed to get the economy moving again, and that would relieve their situations in itself. As the economy picks up, more borrowers will appear and more loans can be made, with the added benefit of fewer delinquencies and defaults. The banks are suffering in the near term, but will be rewarded in the long run.

In concluding his speech, Bernanke remarked that, “Putting all these considerations together, in the longer term the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive.”

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To contact the reporter on this story: Mark Lawson at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com