In order for banks to fully recover from the financial crisis they need to start lending more and “get back to the basics of making loans,” Federal Deposit Insurance Corp. Chairman Sheila Bair said on Wednesday.

While banks have decreased their loan balances in the fourth quarter, “we are looking to the industry to take the next step, and begin to build their loan portfolios, Bair said.

The biggest decrease in loan portfolios came from construction and development, which fell 9 percent or $32.5 billion. However, lending is increasingly slightly in other categories: Lending for residential mortgages inched up by $17 million, or slightly less than 1 percent.

Banks have said they aren’t lending more due to decreased demand with a still sluggish economy.

But the industry’s outlook continues to improve, even for smaller banks who were hard hit by commercial real estate loans that went bad, Bair said. The amount of bad loans — those 90 days or more past due — decreased for the third consecutive quarter.

Source: “U.S. Banks Told They Need to Start Lending Again,” Reuters News (Feb. 23, 2011)

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