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Fed's Yellen says small bank loan growth good sign for economy

Federal Reserve Chair Janet Yellen said Thursday that small U.S. banks have started lending to customers at a higher pace after years of tightening the reins, an encouraging sign for economic growth.

In a speech for community banks, Yellen also reassured these institutions, which focus on lending to regional customers whether in big cities or rural areas, that an onslaught of new rules after the crisis would be tailored to keep life simpler for them.

"After several years of reduced lending following the recession, we are starting to see slow but steady loan growth at community banks,'' Yellen said. "While this expansion in lending must be prudent, on balance I consider this growth an encouraging sign of an improving economy.''

Janet Yellen, chair of the U.S. Federal Reserve.
Daniel Acker | Bloomberg | Getty Images
Janet Yellen, chair of the U.S. Federal Reserve.

Her assessment comes a day after the Fed's policy committee issued a fairly bullish picture of the U.S. economy, and pressed ahead with plans to wind down its bond-buying stimulus program.

Yellen also said that regulators needed to do more work to prevent another taxpayer bailout of large banks should the next crisis hit, and that the Fed was monitoring closely whether they still relied too much on short-term funding.

"We are carefully considering the systemic vulnerabilities that may be posed by over-reliance on short-term wholesale funding and are weighing potential policy responses,'' she said.

Daniel Tarullo, the Fed governor in charge of financial regulation, has repeatedly said that the Fed will come out with new measures for banks that rely most on short-term debt, a type of funding prone to investor runs that was a key reason for the demise of Lehman Brothers in 2008.

Yellen said the tougher regulatory environment constructed in response to the crisis would be "tailored'' to community banks so that the ones with stronger management and less risky portfolios would get less intrusive oversight.

Her remarks came at the Independent Community Bankers of America 2014 Washington Policy Summit in Washington.

—By Reuters with CNBC.com.

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