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In a joint statement issued by the Federal Reserve and the Conference of State Bank Supervisors, the regulators said lenders "should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

The federal government has come under sharp criticism from voters for what was seen as assistance to Wall Street fat cats that failed to trickle down to Main Street.

The regulators said banks have overreacted to the economic climate, making it difficult for "creditworthy small business borrowers" to obtain financing. They blamed "weakness in the broader economy, decreasing loan demand, and higher levels of credit risk and delinquency."

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