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Fed Official: Community Banks May Be at Risk

Monday, 15 Jun 2009 12:11 PM

US's community banks may be at risk -Fed's Tarullo

June 15, 2009

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WASHINGTON (Reuters) - America's community banks may be vulnerable in the current fragile economic environment because of their increased exposure to commercial property, a top Federal Reserve official said on Monday.

Fed Board Governor Daniel Tarullo said community banks, the local lenders that are a core part of the nation's small-town communities, have made more commercial loans, upped leverage levels and relied more on less reliable sources of funding.

"These changes in business strategy, which undoubtedly helped to maintain community bank profitability over much of the past two decades, may in the current financial environment exacerbate the risks faced by community banks," he told the North Carolina Bankers Association in Chapel Hill, N.C.

The speech was made available to media in Washington.

Fed officials worry commercial property may suffer the same fate as the residential housing market, whose 2007 collapse has inflicted the longest U.S. recession since the Great Depression after a meltdown in subprime mortgages sparked global financial panic.

Tarullo said community banks were not responsible for the subprime mess but could not escape its fallout, and he urged that they shore up their finances to weather difficult times.

"Federal Reserve examiners are encouraging community banks to focus on maintaining sound loan quality and strong credit administration practices.

"In addition, they are working with community banks to ensure that they maintain appropriate capital planning, credit administration, and liquidity management policies," he said.

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