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WASHINGTON (MarketWatch) — Federal Reserve Chairman Ben Bernanke on Thursday told community bankers that he recognizes that the central bank’s low interest rates hurts their profitability, but he added that the policy is necessary to drive the economic recovery.
“A common complaint on the part of some community bankers is that very low interest rates hurt their profitability by squeezing net interest margins,” Bernanke told community bankers at a Federal Deposit Insurance Corp. conference in Arlington, Va. “It is necessary to set the negative effects on net interest margins against the positive effects of a strengthening economic and lending environment.”
The central bank chairman also acknowledged concerns among small bankers that the Fed’s examiners have been too tough, hurting their ability to lend.
“In particular, we recognize that new regulations and supervisory requirements may impose disproportionate costs on community banks, which have smaller staffs and less-elaborate information systems than larger banking organizations,” he said.
However, Bernanke argued that Fed supervisors must insist on high standards for lending, management and governance as a means of protecting banks from a “race to the bottom” and the creation of more problems down the road. Banks can make multiple appeals of supervisory decisions, he added.
Bernanke added that despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending. He said small banks must manage concentration risk that comes from too much specialization in a particular category of lending.
Finally, the central bank chairman argued that community banks close ties to local economies is a source of strength, but it also has its drawbacks as an institution can be overly exposed to a local economy.
”The fortunes of communities and their banks tend to rise and fall together‘ he said.
Community banks must also manage concentration risks arising from their specialization in certain categories of lending
The comments come after Bernanke on Friday made a renewed push for programs to convert foreclosed homes into rental units to help revive the housing market. Read about how Bernanke renews push for foreclosed rentals
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On Friday he also suggested programs to create so-called “land banks,” which have the ability to purchase and sell real estate. He said these land banks could buy and rehabilitate foreclosed homes and convert them into rentals. He added that land banks are a “promising” option but the few that exist lack the resources to keep pace with the number of low-value U.S. properties.
In that speech, the central bank chairman reiterated his concerns about so-called “underwater” homeowners who are current on their mortgages, but because they have little or no equity in their homes, they cannot refinance to current low interest rates. 
Ronald D. Orol is a MarketWatch reporter, based in Washington.--MCX

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