A low interest rate policy is clearly appropriate due to the still struggling economy, a top U.S. bank regulator said on Monday, while also expressing frustration that banks are not doing enough to get credit flowing.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said credit-worthy borrowers are still not getting enough access to loans, and more needs to be done.

A policy of low interest rates is clearly appropriate given the struggling economy, Bair said in remarks to the National Association for Business Economics.

The Federal Reserve has vowed to keep borrowing costs ultra low for an extended period. Most big banks that do business with the U.S. central bank believe it will raise the benchmark rate this year from the current zero, a Reuters poll showed.

She said a public spotlight needs to be shined on banks for having pulled back too far on extending credit.

Ramping up small business lending as a way to jump-start economic growth is a key policy initiative of the Obama administration.

U.S. bank regulators have repeatedly issued advisory notes to banks, urging them to extend prudent loans, but Bair said they should stop short of mandating the activity.

If you cross a line and get into a situation where regulators are starting to order banks to lend, the history on that isn't good, she said.

The FDIC's more recent quarterly banking profile showed that loan balances industrywide declined another 1.7 percent, the sixth consecutive quarter of contraction.

Bair said on Monday that smaller banks seem to be doing a better job than the larger institutions in making loans and maintaining loan balances.

The FDIC reported that large banks were responsible for 90 percent of the decline in loan balances during the fourth quarter.

Clearly there was too much credit leading into this crisis and there had to be some pullback, but I am concerned with it moving too far the other way, she said. It is frustrating.

(Reporting by Karey Wutkowski, editing by Maureen Bavdek)