Federal Reserve Chairman Ben Bernanke recently announced that in wake of the government agency's decision to keep mortgage rates low until at least 2014, there should be greater affordability for prospective and current homeowners, as well as a boost for lenders' profitability.
In an address to executives from community banks in Arlington, Virginia, Bernanke said the Fed recognizes and understand any concerns that may have risen from the announcement, but defended the monetary and regulatory policies the Fed has adopted in recent years.
"The purpose of the Federal Reserve's policy of low interest rates is to speed the economic recovery, which will increase loan demand and opportunities for profitable lending, among many other benefits, and thus, ultimately, lead to higher net interest margins," Bernanke said.
A number of critics claim that the lending regulation will cut into net interest margins in addition causing a slow in ending activity.
Regarding this concern, Bernanke replied that "the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive."
Meanwhile, the Federal Reserve chairman recognized the important role community banks are playing in the recovery of the mortgage industry as well as the overall economy. He added, that traditional banking models often used by these small lenders, including the policy of using short-term deposits to fund long-term investments such as commercial real estate loans is a crucial part to a recovery.
However, Bernanke also recognized certain obstacles that community banks are often posed against, especially in the current economic climate.
"While community banks have certain natural advantages, they also face an array of challenges, stemming from both the current economy and, to some extent, from their business model," he said. "The close ties of community banks to local economies is a source of strength, as I mentioned, but those close linkages have drawbacks as well, most notably the resulting concentration of exposures to those same local economies."
Even though some community banks have been forced to shut their doors in the wake of the recession, Bernanke noted that strong institutions will continue to take individual measures to offset new risks that have stemmed from the housing bubble burst.
Additionally, it was added that communication between small lenders and regulators, both at a state and federal level, will be an important factor in the industry's recovery, as both parties have much to learn from one another.