Federal Reserve Governor Elizabeth Duke said that while an improving U.S. economy will help reverse a decline in credit, it may take several years for lending to return to pre-crisis levels.

So far, the resumption of credit growth following the recession has lagged behind all business cycles of the past 40 years except the 1990-91 recession, after which it took three years for consumer credit to recover and almost nine years for commercial real estate, Duke said in a speech to bankers in Columbus, Ohio.

The Fed has held its target interest rate at zero to 0.25 percent since December 2008 to lower borrowing costs and help the economy recover. Even with the record-low interest rates, loans held by commercial banks fell by about 5 percent in 2009, Duke said. The central bank repeated last week that “tight credit” is holding back consumer spending.

“Just as the causes for the decline in lending are multifaceted and complex and took time to evolve, the solutions will likely be equally difficult and will take time to fully work,” Duke, the only former commercial banker on the Fed’s Board of Governors, said at an event for Ohio Bankers’ Day, presented by the Ohio Department of Commerce.

“We at the Federal Reserve, meanwhile, will continue to do everything we can to encourage a return to a healthy credit environment,” said the 57-year-old Duke, who took office in 2008 as then-President George W. Bush’s last Fed appointee.

Asset Sales

Responding to audience questions afterward, Duke said her opinion is that the Fed shouldn’t begin selling its more than $1 trillion in mortgage-backed securities until after it raises interest rates. The central bank should communicate sales “well in advance to the markets so that markets aren’t surprised,” Duke said.

Four areas will determine the availability of credit: bank profits, regulation, borrowers’ demand and the economy’s strength, Duke said.

The banking industry “continues to recovery slowly,” with a measure of net income returning to “about pre-crisis levels for the largest 25 banks” in the first quarter, while smaller banks had net interest margins and non-interest income remain “weaker than they were prior to the crisis,” Duke said. Excluding an accounting change, loans contracted in April and May at about a 7.75 percent rate, she said.

Both strong and weak banks are reducing lending, which is “very different” from past examples when declines could be attributed to drops in the portfolios at weaker banks, Duke said.

Bankers Reluctant

Many bankers have told Duke that they are reluctant to extend new credit or restructure loans because of an “uncertain regulatory environment,” she said. She asked bankers to tell the Fed if its examination policies are “unnecessarily impeding the flow of credit.”

Consumer borrowing rose for the first time in three months in April, according to Fed data. The total amount of outstanding credit to consumers has declined 5.5 percent since reaching a peak in July 2008.

Household spending is constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit,” the Fed’s Open Market Committee said in the statement following its June 22-23 meeting. The panel cited a decline in bank lending in recent months. The Fed renewed its pledge of low interest rates for an “extended period.”

“Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while,” Duke said. Household net worth dropped about 25 percent during the crisis, about 20 percent of mortgage borrowers lack equity in their homes and consumers “remain quite burdened by debt payments,” she said.

Growth Estimate

Consumer spending accounts for about 70 percent of the U.S. economy, and sluggish growth in consumption restrains the pace of recovery. On June 25, the Commerce Department lowered its estimate for growth in the first quarter of 2010 to 2.7 percent from 3 percent, reflecting a smaller gain in consumer spending.

Confidence among U.S. consumers sank in June more than forecast as Americans became distressed over the outlook for jobs and incomes, a report from the New York-based Conference Board said yesterday. Sentiment fell most in regions affected by the oil spill in the Gulf of Mexico.

“It is going to be, I think, a long period for jobs to recover,” Duke said. The U.S. unemployment rate was 9.7 percent in May, close to a 26-year high.

For small businesses, credit conditions “remain tight,” Duke said, citing a National Federation of Independent Business 2009 survey showing 50 percent of borrowers got all or most of the credit they wanted, compared with about 61 percent from 2003 to 2006 who got all they wanted and 28 percent who got most.

Duke and Fed Chairman Ben S. Bernanke heard in discussions in Tampa, Florida, and Detroit that lower values of collateral may be having an effect on business owners’ abilities to get financing, Duke said.