(Reuters) - The weak economic recovery has made it harder for banks to make money from loans but the financial conditions of smaller institutions appear to be solidifying, Federal Reserve Chairman Ben Bernanke said on Thursday.

"Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending," Bernanke told a banking conference.

Despite high ratios of nonperforming assets, asset quality appears to be stabilizing and provisions for loan losses at community banks appear to be decreasing, Bernanke said.

Capital ratios also seem to be improving, he added.

The Fed chairman did not extensively discuss the outlook for the economy or monetary policy in his speech.

Bernanke said he is aware that the central bank's ultra-loose monetary policy has squeezed bank profitability but argued a stronger economy will boost bank business over time.

The Fed cut interest rates to near zero more than three years ago and said in January that the sluggish recovery is likely to warrant keeping rates at fire-sale levels for around another two years.

"In the longer term the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive," Bernanke said.

(Reporting By Mark Felsenthal; Editing by Theodore d'Afflisio)

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