The nation's community banks could play a key role in spurring an economic recovery, Federal Reserve Chairman Ben Bernanke said Friday, as he encouraged them to make loans so long as they can do so prudently and "not to let fear drive" their decisions.

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WASHINGTON — The nation’s community banks could play a key role in spurring an economic recovery, Federal Reserve Chairman Ben Bernanke said Friday, as he encouraged them to make loans so long as they can do so prudently and “not to let fear drive” their decisions.

Fed bank examiners have been directed “to encourage banks to make economically viable loans,” Bernanke told the Independent Community Bankers of America in Phoenix, “provided such lending is based on realistic asset valuations and a balanced assessment” of borrowers’ ability to repay the loans.

Many of the nation’s largest banks have pulled back on lending following massive losses. So far, 18 banks have failed this year.

Smaller local banks have tended to be less exposed to the complicated securities that have dragged down their larger competitors.

“If community banks are prudent but opportunistic in extending credit to strong borrowers, they will help the economy recover while benefiting from that recovery themselves,” Bernanke said. He also said that “in some instances, community banks are able to step in at crucial moments when local businesses or consumers have been unable to find credit elsewhere.”

Some analysts have cautioned that small banks might also encounter a new wave of losses soon — particularly on commercial real estate and development loans. Nonetheless, they might find today’s environment to be a good time to gain new customers, the Fed chairman argued, as many debt markets have all but shut down.

Bernanke expressed sympathy for bankers who feel that they have received “mixed messages” from the government, including orders to continue lending at the same time they are ordered to act cautiously to remain well capitalized.

The speech was Bernanke’s first public comment since a Wednesday decision to inject another $1.2 trillion into the U.S. economy by buying Treasury bonds and mortgage-related securities. He said those moves “are intended to improve conditions in the private credit markets,” particularly by lowering mortgage rates.

He paused during audience applause at several points in his speech, including after saying the largest banks should be subject to “especially close supervisory oversight and be held to the highest prudential standards.”

Regulators must ensure that management compensation at such firms doesn’t “create perverse incentives that can ultimately jeopardize” a firm’s health, he said.

“Widening credit spreads, more-restrictive lending standards and credit-market dysfunction are working against the monetary easing and leading to tighter financial conditions,” Bernanke said.

On compensation, Bernanke said management policies should be aligned with the “long-term prudential interests of the institution … (and) provide appropriate incentives for safe and sound behavior.”

“Supervisors must pay close attention to compensation practices that can create mismatches between the rewards and risks borne by institutions or their managers,” he said.

Bank, credit unions

closed by regulators

Regulators on Friday shut down FirstCity Bank in Georgia, marking the 18th failure this year of a federally insured bank. More are expected to succumb to the prolonged recession.

The Federal Deposit Insurance Corp. (FDIC) was appointed receiver of the failed bank, located in Stockbridge, Ga. It had about $297 million in assets and $278 million in deposits as of March 18.

The FDIC said it will mail checks to depositors of FirstCity Bank for their insured funds on Monday morning. Direct deposits from the federal government, such as Social Security and veterans’ benefits payments, will be transferred to SunTrust Bank.

At the time of closing, FirstCity Bank had an estimated $778,000 in deposits that exceeded the insurance limits, the FDIC said. Regular deposit accounts are insured up to $250,000.

The last bank closing, two weeks ago, also involved a Georgia bank, Freedom Bank of Georgia in Commerce, Ga.

Separately, U.S. regulators seized two credit unions, with total assets of $57 billion, to stabilize a system used by 90 million customers.

U.S. Central Corporate Federal Credit Union, in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., were put into conservatorship, the National Credit Union Administration said in a statement Friday.

Corporate credit unions are chartered to provide products and services to the credit-union system. They don’t directly serve customers.

“Service continues uninterrupted at both U.S. Central Corporate Federal Credit Union and WesCorp.,” the NCUA said in its statement. “Members are free to make deposits and access funds.”

Material from The Associated Press and Bloomberg News was used in these reports.