exceeded the number of downgrades. the last time that upgrades exceeded downgrades was in 2005. in addition, we have stepped up examiner training on relevant lending issues, and we have emphasized to examiners that an open dialogue with bank management is essential. we have also looked into specific concerns raised about the examination process and its effect on banks ’ willingness to lend. for example, during 2011, we reviewed commercial real estate loan classification practices to assess whether examiners were properly implementing the interagency policy statement on workouts of commercial real estate loans. we analyzed documentation for more than 300 loans with identified weaknesses in six federal reserve districts. we found that federal reserve examiners were appropriately implementing the guidance and were consistently taking a balanced approach in determining loan classifications. moreover, the documentation we reviewed indicated that examiners were carefully considering the full range of information provided by bankers, including relevant mitigating factors, in determining the regulatory treatment for the loans. conclusion to sum up, conditions in the banking system – and the financial sector more broadly – have improved significantly in the past few years. banks have strengthened their capital and liquidity positions. the economic recovery has facilitated the rebuilding of capital and helped improve the quality of the loans and other assets on banks ’ balance sheets. nonetheless, banks still have more to do to restore their health and adapt to the post - crisis regulatory and economic environment. as the recovery gains greater traction, increasing both the demand for example, see william f. bassett, mary beth chosak, john c. driscoll, and egon zakrajsek ( 2012 ), “ changes in bank lending standards and the macroeconomy ( pdf ), ” finance and economics discussion series 2012 – 24 ( washington : board of governors of the federal reserve system, may ) ; and jose m. berrospide and rochelle m. edge ( 2010 ), “ the effects of bank capital on lending : what do we know, and what does it mean? ” international journal of central banking, vol. 6 ( december ), pp. 5 – 54. bis central bankers ’ speeches for credit and the creditworthiness of potential borrowers, a financially stronger banking system will be well positioned to expand its lending. improving credit conditions will in turn help create a more robust economy. bis central bankers ’ speeches

. banks have focused on c & i lending because business borrowers ’ creditworthiness is improving and because the majority of c & i loans carry floating interest rates that reduce interest rate risk. in addition, domestic banks reportedly are picking up customers as a result of a pullback by some european institutions. auto lending also has reportedly been solid, reflecting strong fundamentals in auto markets – such as robust demand for used cars and relatively low delinquency rates on existing auto loans. the strong fundamentals for auto loans in turn also appear to have contributed to an easing of lending standards and terms. but, as i mentioned earlier, residential mortgage lending has been particularly sluggish. tight lending standards and terms remain especially evident. to be sure, a return to pre - crisis lending standards for residential mortgages wouldn ’ t be appropriate ; however, current standards may be limiting or preventing lending to many creditworthy borrowers. for instance, in the april sloos, we asked banks a hypothetical question about their willingness to originate gse - eligible mortgages relative to 2006 for borrowers with a range of credit scores and available down payments. the sloos found that even when the loans were accompanied by a 20 percent down payment, many banks were less likely to originate loans to borrowers with given gse - eligible credit scores, despite the originating bank ’ s ability to sell the mortgage to the gses. most banks indicated that their reluctance to accept mortgage applications from borrowers with less - than - perfect records is related to “ putback risk ” – the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way. small businesses owners, who in the past might have tapped into the equity in their homes or used their homes as collateral for small business loans, also have found conditions challenging in recent years. the stock of small loans to businesses on bank balance sheets at the end of last year was more than 15 percent below its peak in 2008. these loans looked to have ticked up in the fourth quarter of 2011, consistent with the reported increase in demand for loans by small firms in the sloos. responses to the monthly national federation of independent business survey also suggest some modest improvement in the small business sector : the share of respondents reporting a need for credit has moved up from lows of recent years, and the net share of respondents who say that credit is more difficult to obtain than it was three months ago is notably