By Yali N’Diaye

WASHINGTON (MNI) – In light of an improved economic outlook, fewer
lenders are tightening standards, and both demand and supply of credit
should increase, Federal Reserve Governor Elizabeth Duke said Wednesday.

Yet, uncertainties remain as the recent stock market decline —
biting into households’ net worth — demonstrates, she said in remarks
prepared for the Ohio Bankers Day in Columbus.

And while the banking sector continues its slow recovery, credit
demand and outstanding are still down, with “no single step that can be
taken to quickly unclog all lending markets.” And just as the reasons
behind the credit decline are complex, solutions will “take time to
fully work,” Duke warned.

In a speech titled ‘Fostering a Healthy Credit Environment,’ the
governor’s comments mostly focused on the key factors determining
credit, the strength of the economy being only one of four. So she made
only limited comments about the current state of the economy.

“In light of the improved economic outlook, fewer lenders are
tightening loan standards,” Duke said.

She added that “business spending for equipment and software
continues to improve, which should ultimately lead to more demand for
bank credit.”

She concluded, “As economic activity picks up and importantly, the
economic outlook brightens, I would expect both the supply of credit and
the demand for credit to improve.”

The road is not without bumps, however, and “Just looking at the
statistics, it is not hard to construct a scenario in which consumer
demand for credit remains sluggish for quite a while,” Duke said.

She noted that households’ net worth did somewhat rebuild from the
crisis, but “recent retrenchment in those (stock) markets demonstrates
the volatility that remains.”

Small businesses also face their difficulties in obtaining credit
from banks, Duke said, noting that “a number of indicators suggest that
demand for credit by small businesses is down.”

She added that “some potential borrowers are likely on the
sidelines waiting for a good reason to expand or build inventories.”

The Fed, however, will do “everything it can” to restore healthy
credit conditions, and to that effect, it has been meeting with small
businesses at local forums.

After gathering information at such meetings, the Fed will hold a
conference in July in Washington, where “emerging themes, best
practices, and common challenges will be presented.”

While supervisory rules and regulators should not impede lending,
Duke, stressed the importance of focusing lending only to eligible
borrowers, adding that “Too much credit leads to underwriting mistakes
and mispricing of risks, as well as an overheated economy.”

While economic strength and the financial condition of businesses
and consumers are key factors influencing credit supply and demand, the
Fed is also monitoring the banking system and the regulatory climate.

Looking at the banking system, Duke noted that “reductions in bank
lending can be seen at both the strong and weak banks.”

That said, “The banking sector continues to recover slowly,” Duke
said.

On the regulatory environment, Duke stressed ongoing uncertainties,
not only because Congress continues to draw a new framework for the
future, but because bankers “are also concerned about the stance of bank
examiners in bank examinations right now.”

She reassured that It is not “possible for regulators to urge banks
to make loans that are outside their risk tolerance or that would be
unsafe or unsound.”

** Market News International Washington Bureau: 202-371-2121 **

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