WASHINGTON, DC - During a hearing before the Senate Banking Committee today, U.S. Senator Herb Kohl questioned the Chairman of the Federal Reserve, Ben Bernanke, on the role of the Federal Reserve in helping small banks restart lending practices. Chairman Bernanke testified before the Banking Committee, on which Kohl serves, during a hearing on U.S. monetary policy. Additionally, Kohl pressed for policy recommendations on increasing personal savings rates and stabilizing consumer credit.  

"The Federal Reserve has been increasing their balance sheet over the past year and created many new lending programs to continue the flow of credit to consumers and stabilize the financial markets," Kohl said.  "Additionally, the Federal Reserve announced that it will purchase up to $1.25 trillion of mortgage backed securities by the end of 2009 to help support the housing markets.  Despite all these efforts, loans and lines of credit are hard to come by for many credit-worthy consumers in smaller communities and community banks are having a difficult time originating new loans. The Federal Reserve has done precious little for small, community banks at the national level."                

"What and when can the Federal Reserve help small banks start lending again?" Kohl asked Bernanke.              

Chairman Bernanke indicated that small banks play a large role in our economy and that credit is available for small banks through the traditional programs offered by the Federal Reserve, such as the Discount Window. He also mentioned that the Treasury Department can expand which banks are eligible for TARP funds. Bernanke agreed with Senator Kohl that small banks are not getting as much attention at a national level as their larger counterparts.  

Kohl asked Chairman Bernanke for policy recommendations that would help continue the upward trend of the personal savings rate and avoid another bubble based on consumer credit.  

"While consumer spending has remained flat through 2009, the personal savings rate has finally started to rise," Kohl said. "The weak economy has made consumers more skeptical of borrowing and increasingly aware of their spending habits.  As Congress considers reforms to the banking system to help financial institutions prepare for possible future economic downturns, we also have to help prepare American families for their next economic crisis."  

Chairman Bernanke responded that there are behavioral approaches that can be changed through programs involving financial literacy and financial education. These programs should highlight the benefits of wise monetary savings and spending. He also noted that policy makers have been struggling with this for some time and there are not a lot of silver linings in the financial crisis, but the increased savings rate is one of them. He acknowledged that there is no magic bullet to increase individual saving practices, but indicated that Congress has been trying to take positive steps to help people plan for the future.    

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