U.S. bank lending continues to decline even though the banking sector is recovering, and it may be years before lending returns to pre-crisis levels, Federal Reserve Governor Elizabeth Duke said on Wednesday.
While it is still early in this recovery period, the return of credit to pre-recession levels has lagged that of all other cycles of the past 40 years with the exception of the 1990-91 recession, she told a bank conference.
Even though the financial crisis is subsiding, lending has not recovered, said Duke, a former community banker. In April and May total loans held by commercial banks contracted at an estimated 7-3/4 percent rate, when adjusted for the effects of an accounting change that added to the volume of loans on bank balance sheets, she said.
Bankers tell her that an uncertain regulatory environment and strict oversight has held back lending, Duke said. She said regulators do not want to encourage risky lending, but urged banks to lend to credit-worthy borrowers.
Where prudent loans can be made, we want to do everything we can to make sure those deals are struck, she said. It's best for the banks, it's best for the borrower, and it's best for our economy as a whole, she said.
The reduction of credit is also due to a weaker demand for credit as consumers, stung by the recession, keep their wallets in their pockets, and as small business sales remain sluggish, the Fed governor said.
(Reporting by Jim Leckrone; Writing by Mark Felsenthal; Editing by Andrea Ricci)