FDIC Chief Says Biggest Banks Must Increase Lending, or Recovery Will Stall U.S. banks last year registered their steepest decline in lending in 67 years.

March 8, 2010  -- The biggest banks in the United States should suffer under the glare of the public spotlight if they do not increase lending to businesses and consumers, a key U.S. banking regulator said Monday.

"A light needs to be shined on this and explanations need to be made where credit is not being provided," Federal Deposit Insurance Corp. chief Sheila Bair said at an economists' conference just outside Washington, D.C.

U.S. banks last year registered their steepest decline in lending in the last 67 years, with total \outstanding loans plunging by 7.5 percent. While easy credit to unworthy borrowers was one of the culprits of the recent financial crisis, tight credit could now hinder the country's economic recovery.

The country's biggest banks, Bair said, are currently not lending as much as their smaller counterparts.

"If you cross the line," she said, "and get into a situation where regulators are starting to order banks to lend, the history of that isn't good. But I do think shining a public spotlight on it and maintaining public pressure is something we can do."

Bair spoke at a conference in Arlington, Va., hosted by the National Association of Business Economists. In a survey released by the group Monday, 63 percent of economists said they anticipate the Federal Reserve will raise its key interest rate soon, while 80 percent expressed concern that the country's soaring deficits will eventually result in higher borrowing costs for the country.

Doug Elmendorf, director of the non-partisan Congressional Budget Office, warned in a speech to the conference that U.S. budget deficits are on "an unsustainable path" and at this pace will pose "a growing risk to the recovery."