FDIC’s Bair sees low interest rates + more lending

US banking regulator Sheila Bair said Monday that a low interest rate policy is “clearly appropriate” to get credit flowing, while also saying regulators should stop short of ordering banks to lend.

Ms.Bair, chairman of the Federal Deposit Insurance Corp, has expressed frustration that creditworthy borrowers, including small businesses, cannot get loans in today atmosphere.
“A policy of low interest rates is clearly appropriate given the struggling economy,” Bair said in remarks to the National Association for Business Economics. “Clearly there was too much credit leading into this crisis … but I am concerned with it moving too far the other way.”

The Federal Reserve has vowed to keep borrowing costs ultra low for an “extended period.” Most big banks that do business with the US central bank believe it will raise the benchmark rate this year from the current Zero, a recent poll showed. Here at EH we do not see that is likely until 2011.

Total loans in the banking industry fell by 7.5% during Y 2009, the largest full-year decline since Y 1942.

Ms. Bair said there are plenty of instances of banks being too tight with credit, particularly large banks.

She said a public spotlight needs to be shined on banks for having pulled back too far on credit. “The smaller banks seem to be doing a better job than the larger institutions in making loans or maintaining loan balances,” Bair said.

Increasing small business lending, as a way to jump-start economic growth, is a Key initiative of the Obama administration.

US bank regulators have repeatedly issued advisory notes to banks, urging them to extend prudent loans, but Bair said they should not mandate the activity.—Paul A. Ebeling, Jnr. www.livetradingnews.com

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