"It is especially important in this environment to be sure that you have the capacity to make -- and are making -- all possible loans to credit worthy borrowers
Duke said massive government support for the financial system "is having a positive effect," but the performance of banks "of all sizes and types" is still suffering.
The U.S. economy seems to be past the worst but is not primed for a fast bounce, Duke said.
"Economic conditions are stabilizing or, where they are still deteriorating, appear to be doing so more slowly. But economic activity is still at a low level," she said.
Confidence in the financial system has not returned to pre-crisis levels, despite "modest signs of improvement" in markets, Duke added.
The policy-maker told bankers that if they had received funds under the Troubled Asset Relief Program, or TARP, they should "consider holding it in reserve for a little longer, at least until conditions are more favorable."
The Guide to Understanding TARP
"Once you repay the TARP investment, it likely will not be available again," Duke said.
