Governor Elizabeth A. Duke At the Economic Forecast Forum, Raleigh, North Carolina, January 4, 2010 – The Economic Outlook
“A number of factors are at work in explaining the reduction in bank loans. For instance, for most commercial banks, the quality of existing loan portfolios continues to deteriorate as levels of delinquent and nonperforming loans are still rising. In response, banks have reduced existing lines of credit sharply and tightened their standards and terms for new credit. In addition, banks with capital positions that have been eroded by losses or those with limited access to capital markets may be reducing risky assets to improve their capital positions, especially amid continued uncertainty about the economic outlook and possible future loan losses. During this financial crisis, a number of lending relationships have been severed as individual banks sought to reduce loan portfolios or concentrations within those portfolios or as banks failed or merged. Established banking relationships are particularly important to small businesses, who generally do not have access to broader capital markets and for whom credit extension is often based on private information acquired through repeated interactions over time. When existing lending relationships are broken, time may be required for other banks to establish and build such relationships, allowing lending to resume.”
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