Reader Question: Why Aren’t Banks Lending?
March 24, 2009 by Miranda Marquit
Filed under Finance
I received this question from a friend today, with regard to banks, lending (or the lack thereof) and the credit crunch:
Wasn’t the point of the bank bailouts originally to keep the credit markets going? And if so, a) why are banks still not lending even after receiving the money and b) at the very least, why are they calling in all these huge debts and putting all these companies out of business?
A lovely point! Everything that has been done, from emergency loans to TARP to the latest bank rescue plan from Timothy Geithner has been aimed at trying to free up capital so that banks will start lending — especially to consumers. Unfortunately, as you may have noticed, this hasn’t necessarily translated into loans for the rest of us. Here are some of the reasons that banks aren’t really that interested in taking the taxpayer money that is supporting them and lending it back out (with interest, of course):
- Banks just don’t want to lend. One reason banks aren’t lending is because they don’t want to. They’d rather use that capital to shore up their books. Plus, they’ve been burned by their horrible decisions. Of course, the argument could be made that they are over-reacting, going too far the other direction. Technically, though, banks are lending — just not to you or me. Insider lending, to executives and directors, is going on right now.
- Banks still have to cover toxic assets. Many bank still have toxic assets on their balance books, and they are using some of the money to balance that out. Also, foreclosures and credit card loan defaults are still expected in the coming months, so banks are hoarding cash to get to that point.
- Banks owe money to others. Consider AIG: Most of the money it has been getting, rather than going to junkets or bonuses (as outrageous as that is), has been funneled to its own creditors, like Goldman Sachs. Other financial institutions are also paying off their debts.
As far as calling in debts, banks are just trying to get what they can, as quickly as they can. They are hoping to get lump sum capital — as much of it as they can.
Bottom line: Our leaders may have wanted banks to lend to us, but unfortunately have taken a “trickle down” approach. And we know how well that’s been working. Banks have just been holding on to the capital because they don’t really need worry about it. All they have to do is yell about how if they fail the whole economy goes down and everyone panics and agrees to give them more money.
Perhaps it would have been more effective for our leaders to buy our consumer debt. It would have cost less (more than $11 trillion — most of it for financial institutions — has been spent on economic stimulus so far). And it would have had a positive effect on bank balance sheets and automatically boosted everyone’s ability to borrow more. Even if more consumer lending is not the best thing, it’s our leaders’ stated goals. What they’ve done so far hasn’t even brought them to a point to where that is feasible.
Actually the majority of banks are doing just fine and indeed are lending.
There really is no credit crunch at *most* banks…
http://mast-economy.blogspot.com/2008/12/no-credit-crunch-for-most-banks.html
The problem with toxic assets is mostly concentrated in the top 19 “elite” banks. Those are where the problems lie…
http://mast-economy.blogspot.com/2009/02/bernake-gets-it-just-right.html
You make a good point — for some banks on the local level. Local and regional banks are indeed lending at a higher rate than the so-called elite. Unfortunately, though, focus is on the big banks because that is who is getting all the taxpayer dollars. You like to see organizations who are getting all this money turn around and do what they’re supposed to do…
Where to begin…… I don’t agree with very much in this article other than the implication that the AIG situation is a disgrace that politicians in both parties have abetted.
Personally, I’ve had no shortage of banks trying to loan me money, even though I have no desire for it. The banks internal figures also show a significant amount of lending (Wells Fargo $51B in Jan, BAC $115B in the 4th quarter) so the statements by politicians, etc., to the contrary are just plain wrong and misleading (imagine that). Loan securitization is where the marketplace has gone on strike because it doesn’t trust the quality of what’s packaged in the securities. Hence, the Geithner plan to clear questionable assets off of bank books, and help hedge funds and other financial intermediaries make a large profit while the taxpayers shoulder all the risk.
I won’t debate the merits of that plan here, but I’m not sure more credit is the answer to our economic woes. The consumer clearly needs less debt, especially credit card debt. For our long-term good, we need to change from being a society of consumers to a society of savers and producers. Demographics are helping propel this trend.
The banks are seeing a dramatic increase in deposits. The yield curve is normal and very favorable for bank profits. The Fed is artificially driving down interest rates to drive up demand for housing and place a floor under prices. These are all trends that bode well for the future. And the Congressional shenanigans surrounding AIG have motivated a lot of bankers to double up on efforts to repay the TARP as soon as the Treasury will let them.
Doom and gloomers see the glass as 9/10 empty, but it is starting to refill. Why should it be a surprise to anyone that banks have gotten religion and are only lending to the most credit-worthy? Isn’t that what they should have doing in the first place? Who wants to live in country built on trickle-up poverty anyway?