Banks play an important, though perhaps somewhat diminished, role in providing credit as consumers and businesses increasingly turn to other financial players, Federal Reserve Chairman Ben Bernanke said Friday.
"Banks do continue to play a central role in credit markets; in particular, because of the burgeoning market for loan sales, banks originate considerably more loans than they keep on their books," Bernanke said.
"Nevertheless, nonbank lenders have become increasingly important in many credit markets, and relatively few borrowers are restricted to banks as sources of credit," the Fed chief told a monetary policy conference in Atlanta.
A copy of Bernanke's prepared remarks was made available in Washington.
The United States' financial landscape has changed over the past decades. A company, for instance, can turn to a venture capitalist or Wall Street firm to tap financial capital. A prospective homeowner can turn to various mortgage providers — other than a traditional bank — to get a home loan.
The implications of the expanding pool of credit providers and their impact on the effectiveness of monetary policy warrants further research, Bernanke said. "Does the rise of nonbank lenders make the bank-lending channel irrelevant? I am not so sure that it does," Bernanke told the conference sponsored by the Federal Reserve Bank of Atlanta.
The health of the financial sector can have implications for the overall economy's performance.
"Just as a healthy financial system promotes growth, adverse financial conditions may prevent an economy from reaching its potential," Bernanke said. Japan had faced this situation when its financial problems at banks and corporations contributed to subpar economic growth during the so-called "lost decade," Bernanke said.
Changes in financial conditions such as home prices also can affect consumers' willingness to spend and invest — perhaps somewhat more than conventional economic wisdom would suggest, Bernanke said. This, too, he said, merits further study.
Some research suggests that a drop in house prices might have more of an effect on people who have little equity built up in their homes, Bernanke said. The structure of their mortgages also might affect consumers' appetite to spend, he added.
"In countries like the United Kingdom, for example, where most mortgages have adjustable rates, changes in short-term interest rates ... have an almost immediate effect on household cash flows," the Fed chief said. "In an economy where most mortgages carry fixed rates, such as the United States, that channel of effect may be more muted," he added. "I do not think we know at this point whether, in the case of households, these effects are quantitatively significant. ... Certainly these issues seem worthy of further study."
In his speech and brief remarks afterward, Bernanke did not discuss the future course of interest rates or economic conditions in the United States.
The Fed meets next on June 27-28. Economists predict Bernanke and his colleagues will leave a key interest rate at 5.25 percent, where it has stood for a year. The Fed believes the economy is rebounding in the current April-to-June quarter after a nearly yearlong sluggish spell. The Fed predicts inflation will recede — despite the recent run-up in energy prices.
That being said, Fed policymakers say the biggest threat to the economy is if this inflation improvement doesn't' materialize as anticipated.
As financial markets have become globalized over the years, they may have become "better able to absorb risk and absorb shock," Bernanke suggested during the question and answer session.