Federal Reserve Chairman Ben Bernanke said community banks are improving.
The long maligned sector has accounted for a majority of bank failures since the 2008 financial crisis. Of the 392 bank failures between January 2008 and September 2011, 326 were community banks, according to the Federal Deposit Insurance Corp.
These smaller firms became over exposed to concentrated struggles in their areas, particularly Georgia, where community banks funded much of the residential and commercial buildup leading to the crisis. Since then, the firms that survived complain of extraordinary burdens from the Dodd-Frank Act and increased examinations from the FDIC.
"Despite economic uncertainties, the condition of community banks is improving, which is reassuring given their undeniable importance to the health of our nation's economy," Bernanke said in his speech at the FDIC Thursday.
There were 92 bank failures in 2011, down from 157 closings the year before. For a break down of the trends in bank failures since the crisis, pick up the February issue of HousingWire.
FDIC Chairman Martin Gruenberg told CNBC following Bernanke's speech that failures and problem banks are trending downward as the economy slowly recovers.
"I think community banks, most of them, are doing quite well," Gruenberg said. "They're more than holding their own with the underlying economy and the longer term challenges."
Bernanke also said the Fed will work to keep lines of communication open as it works to steady the national and global economic system. Rules from the Dodd-Frank Act meant to blockade the risks created by large banks, he assured, would not "find their way" to smaller firms.
"That...is not our intent, and we will work to ensure that it does not happen," Bernanke said.
Community bankers raised concern of the Fed's monetary policy. By keeping the federal funds target rate at roughly 0%, it hurts profitability at smaller firms by constraining net interest margins, some said.
Bernanke did say the difference between the yield on safe assets such as Treasury securities — which banks are forced to hold when loan demand is weak — and the rate paid on deposits is "relatively low."
However, net interest margins also depend on the difference between the return on the loans the bank writes and the yield on these safe assets. Bernanke defended the lower rate, claiming the discount would mean more demand for taking out loans such as mortgages.
Pending home sales climbed to the highest level in 19 months in November, according to the National Association of Realtors, but many economists believe more needs to be done to fix housing before demand can rise to the levels necessary to forge profits and thus rejuvenate these struggling firms. In December, pending home sales dropped 3.5%.
Cam Fines, CEO of the Independent Community Bankers Association, attended the speech. Fines said holding the federal funds rate so low works in the short term, but smaller institutions that "load-up" on longer-term Treasurys could find themselves upside down when the rates do go up. Essentially, these small banks could be funding long-term loans with expensive short-term deposits, which is what led to the savings and loan crisis in the late 1980s.
Still, Fines sympathized with Bernanke, who must carefully manage the economic levers at his disposal in order to avoid near-term threats.
"He's in a tough position. He has so many things to consider," Fines said.
Bernanke admittedly said the lingering problems in state and national economies leave many challenges for community banks.
"Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending," Bernanke said.
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