Drop In Bank Lending Does Not Mean There Is A Problem In Banks

[JimofPennsylvan]

There is no reason to be alarmed about the drop in lending amongst America’s largest banks. These critics who are stoking the fire trying to say there is a problem with America’s big banks not lending quite possibly may cause serious problems in the banking industry. If they don’t cut it out they may cause Washington to take action which may ultimately seriously hurt banks.



These critics like to say amongst the big banks receiving TARP money lending dropped around 4.5 % in February from January of this year or for February of this year’s lending figures dropped around twenty-five percent compared with October of last year. These critics continually ignore context. Currently America is in the worst recession in the last seventy five years if one considers the comprehensive harm to our country from this recession. All these negative lending statistics are to be expected from this recession. U.S. businesses have laid off four million people in the last sixteen months, businesses are unsure about when the economic recovery will be coming and how strong it will be, America is a consumer based economy and America’s consumer are unsure about America’s economic recovery.



U.S. banks are not receiving the demand for burrowing that existed prior to the recession. When banks receive lending requests they are naturally going to scrutinize these requests more carefully and be more cautious in their lending because of the recession. A recent study found that sixty percent of the heads of businesses expect revenue to be down throughout the balance of this year and it was a fairly large study, now if heads of businesses expect low earning this year don’t you think their bankers should be considering this reality in deciding to lend credit to such businesses. This whole criticism of banks and their curtailment in lending is really laughable when it comes to certain areas of lending like commercial lending involving building and construction. Malls and Retail buildings have seen dramatic increases in retailers going bankrupt or in financial rough times, owners of office building aren’t getting expected lease rates, condominium developers are having a nightmare of a time selling condominiums. Bank management would be negligent if they weren’t abandoning “business as usual” behavior and making a great effort to insure they don’t make troubled loans.



Critics really have to stop stoking members of Congress and the executive branch of government to come down hard on banks to lend more. This activity quite possibly may cause government actions which will cause harm in banks and many banks are still somewhat in a fragile financial state, it may push some banks into a track where they fail directly or indirectly (they have to be sold).



All these critics that want to sound the alarm on bank lending are forgetting some critical lessons that every American should be hoping with all their heart America’s leaders have learned. Deep recessions on an economy take a long-time to recover from, it takes a long-time for consumer and business spending to come back to normal as well as a long time for credit markets to return to normal. Therefore, America leaders should be damn well sure that the regulation of America’s financial industries has no significant flaws and that the American government’s fiscal and monetary policies are such that they aren’t going to trigger any events that have a cascading effect that drive the U.S. economy into such an undesirable state of being in a deep recession. The observed drop in U.S. bank lending is simply a situation analogous to when a person gets seriously ill it takes a long-time for that person to recover, the ill person can belly ache as long and hard as he or she wants about the slow pace of recovery it doesn’t matter the ill person still has to go through the natural healing process.

 

[garyd]

And?

Banks that don't make loans don't make any more money. Like it or not any way you look whatever the reason a drop in lending isn't a good thing.

 

[neurosport]

didn't read your OP but agree with the title.

drop in lending may be a necessary adjustment.

why should anybody get a loan to build a new house for example when there are 20 million empty ones.

 

[editec]

Corporations borrow far more money than consumers do.

And the difficulty some corporations are having raising money is a problem for the economy.

I offer no solution, and am merely responding to the idea that this problem is all about the real estate crises.

It isn't.

 

[Iriemon]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

 

[American Horse]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

I would expect my bank to reduce lending when there is a reduction of good projects to lend on. It's simply a function of the recession.

I am hard pressed right now to come up with a project that would be likely to succeed or produce a positive cash flow from which to pay my bank interest while I wait for a recovery in the economy; it's a form of self discipline. If I'm not willing to invest my own capital why would my bank invest theirs?

Banks can be expected to hold tighter lending reins on dubious new projects. It is a good thing when banks keep people from making financial mistakes.

The line of thinking that suggests lending should be up is a shade of the Fannie/Freddie schematic.

My business is completely in real-estate development and construction, but the same rules apply to all types of businesses, even financing the payroll of ongoing businesses. If it appears that a business is on the brink of going out of business, why would it be a sound business option to lend them more money they would likely fail to repay?

 

[neurosport]

Horse you're the man !

 

[editec]

It has been my understanding that the banks originally stopped lending because they couldn't be certain what the values of their assets were, hence they couldn't be sure that they had enough capital reserves to lend more money.

It is also my understanding that many banks had lent out so much money that they were lending 30-45 times their capital reserves ever BEFORE the value of their assets was being questioned.

Right now, banks can borrow money at ZERO % interest from the Fed.

So, given that they can lend it out at rates 4.5% to whatever rates of interest that choose (as with crtedit cards) , I'm having difficulty believing that from the banks stand point corporations aand consumers which have had a long history of repaying their debts are NOT creditworthy.

What do you think I have missed, Horse?

Of course I understand why banks might be reluctant to lend to a real estate developer in areas where the empty houses testify to the excesses in that industry, but sruely our entire economy isn't in that sorry state, is it?

 

[Iriemon]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

I would expect my bank to reduce lending when there is a reduction of good projects to lend on. It's simply a function of the recession.

If that was why lending froze you'd have a point. But the reason lending froze is not for lack of good projects but because banks don't trust assets they or other banks hold.

I am hard pressed right now to come up with a project that would be likely to succeed or produce a positive cash flow from which to pay my bank interest while I wait for a recovery in the economy; it's a form of self discipline. If I'm not willing to invest my own capital why would my bank invest theirs?

That is the argument for Govt lending. In a recession, everything looks bad. Businesses that were operating just fine before the recession now find there debt being called and no new credit available and they are being forced to come up with more cash at a time when no one is buying their products because of the recession.

And it is a self fulfilling spiral.

Banks can be expected to hold tighter lending reins on dubious new projects. It is a good thing when banks keep people from making financial mistakes.

And the more businesses fail, the worse other businesses look, and it looks like lots of businesses are making "mistakes".

The line of thinking that suggests lending should be up is a shade of the Fannie/Freddie schematic.

My business is completely in real-estate development and construction, but the same rules apply to all types of businesses, even financing the payroll of ongoing businesses. If it appears that a business is on the brink of going out of business, why would it be a sound business option to lend them more money they would likely fail to repay?

It wouldn't be. That is the problem. That is why the economy is diving and in danger of going over a cliff. That is the justification for massive govt intervention to prevent it, that our friends in the Murdoch outlets and their followers are constantly yammering about.

 

[Iriemon]

It has been my understanding that the banks originally stopped lending because they couldn't be certain what the values of their assets were, hence they couldn't be sure that they had enough capital reserves to lend more money.

It is also my understanding that many banks had lent out so much money that they were lending 30-45 times their capital reserves ever BEFORE the value of their assets was being questioned.

Banks are limited by regulation to lending out a max of 9x their reserves. One of the regulations that didn't get nixed, which is a good thing.

Other finanical institutions were not bound by that restrictions and for some of the more problematic ones I think your comment applies.

Right now, banks can borrow money at ZERO % interest from the Fed.

So, given that they can lend it out at rates 4.5% to whatever rates of interest that choose (as with crtedit cards) , I'm having difficulty believing that from the banks stand point corporations aand consumers which have had a long history of repaying their debts are NOT creditworthy.

What do you think I have missed, Horse?

Of course I understand why banks might be reluctant to lend to a real estate developer in areas where the empty houses testify to the excesses in that industry, but sruely our entire economy isn't in that sorry state, is it?

6% real annualized GDP decline 4thQ08 is pretty sorry. 1stQ09 isn't looking any better.

 

[Sinatra]

Corporations borrow far more money than consumers do.

And the difficulty some corporations are having raising money is a problem for the economy.

I offer no solution, and am merely responding to the idea that this problem is all about the real estate crises.

It isn't.

You cut to the chase here - well done.

From large corps to small business, access to credit has been reduced to a trickle and that is costing jobs. Right now we are seeing a reduction in private sector jobs and an increase in government jobs.

That is not healthy for the longer term sustainability of our economy.

The money must begin to flow more freely, or we are in big doo-doo...

 

[American Horse]

It has been my understanding that the banks originally stopped lending because they couldn't be certain what the values of their assets were, hence they couldn't be sure that they had enough capital reserves to lend more money.

It is also my understanding that many banks had lent out so much money that they were lending 30-45 times their capital reserves ever BEFORE the value of their assets was being questioned.

Right now, banks can borrow money at ZERO % interest from the Fed.

So, given that they can lend it out at rates 4.5% to whatever rates of interest that choose (as with crtedit cards) , I'm having difficulty believing that from the banks stand point corporations aand consumers which have had a long history of repaying their debts are NOT creditworthy.

What do you think I have missed, Horse?

Of course I understand why banks might be reluctant to lend to a real estate developer in areas where the empty houses testify to the excesses in that industry, but sruely our entire economy isn't in that sorry state, is it?

I think you may have missed the point or my post; that it is viable "projects" that are needed, not simply loans to be lent. The word projects describes useful productive work like the implementation of new ideas involving manufacturing operations. Houses and land are just the most basic applications of the same thing.

 

[editec]

It has been my understanding that the banks originally stopped lending because they couldn't be certain what the values of their assets were, hence they couldn't be sure that they had enough capital reserves to lend more money.

It is also my understanding that many banks had lent out so much money that they were lending 30-45 times their capital reserves ever BEFORE the value of their assets was being questioned.

Banks are limited by regulation to lending out a max of 9x their reserves. One of the regulations that didn't get nixed, which is a good thing.

No, I don't think so. Good idea, and that might have been the case before, but it certainly isn't what the reports I've been reading have been telling me.

Other finanical institutions were not bound by that restrictions and for some of the more problematic ones I think your comment applies.

No, I don't think so. Was a time that was true, not any longer.

Right now, banks can borrow money at ZERO % interest from the Fed.

So, given that they can lend it out at rates 4.5% to whatever rates of interest that choose (as with crtedit cards) , I'm having difficulty believing that from the banks stand point corporations aand consumers which have had a long history of repaying their debts are NOT creditworthy.

What do you think I have missed, Horse?

Of course I understand why banks might be reluctant to lend to a real estate developer in areas where the empty houses testify to the excesses in that industry, but sruely our entire economy isn't in that sorry state, is it?

6% real annualized GDP decline 4thQ08 is pretty sorry. 1stQ09 isn't looking any better.

Understood.

We're in that vicious cycle of slow economy where everyone holds onto their assets hence slwing down the economy still more.

And this after guaranteeing the banks 9 TRILLION bucks to cover their toxic assets?

Had the Feds lend our 9 Trillion (at interest) to the PEOPLE without bothering to save the banks, the economy would have revived quickly enough.

Trickle UP economics.

 

[Iriemon]

No, I don't think so. Good idea, and that might have been the case before, but it certainly isn't what the reports I've been reading have been telling me.

No, I don't think so. Was a time that was true, not any longer.

10% for banks per this source.

Reserve requirement - Wikipedia, the free encyclopedia

6% real annualized GDP decline 4thQ08 is pretty sorry. 1stQ09 isn't looking any better.

Understood.

We're in that vicious cycle of slow economy where everyone holds onto their assets hence slwing down the economy still more.

And this after guaranteeing the banks 9 TRILLION bucks to cover their toxic assets?

Had the Feds lend our 9 Trillion (at interest) to the PEOPLE without bothering to save the banks, the economy would have revived quickly enough.

Trickle UP economics.

Of course there's a huge difference between guaranteeing $9 trillion (which I think is high, maybe that is the potential) and actually lending out that amount of money.

 

[mash107]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

 

[Iriemon]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

Why can't they get savings because the Govt lowers interest rates to 0%? Buy a T-Bill and get 0% or put it with a bank and get more.

 

[mash107]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

Why can't they get savings because the Govt lowers interest rates to 0%? Buy a T-Bill and get 0% or put it with a bank and get more.

How many more people would be willing to save if interest rates were at their normal, market levels? The fact that you don't get anything for saving is a huge discouragement to for people to save their capital.

 

[Iriemon]

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

Why can't they get savings because the Govt lowers interest rates to 0%? Buy a T-Bill and get 0% or put it with a bank and get more.

How many more people would be willing to save if interest rates were at their normal, market levels? The fact that you don't get anything for saving is a huge discouragement to for people to save their capital.

Yeah that's my point. They're not going to give it to the Govt and earn 0%. An FDIC insured bank can offer 2% and it looks like a good deal. So why wouldn't that attract savings?

Plus, compared to 0% or even 2%, even a scary stock market looks more tempting.

 

[mash107]

Banks don't lend they don't make money.

Business can't borrow it's production goes negative.

It's not a good thing.

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

Why can't they get savings because the Govt lowers interest rates to 0%? Buy a T-Bill and get 0% or put it with a bank and get more.

How many more people would be willing to save if interest rates were at their normal, market levels? The fact that you don't get anything for saving is a huge discouragement to for people to save their capital.

 

[Iriemon]

Banks can't lend if they don't have capital.

They can't get capital if they don't have savings.

They can't get savings if government artificially lowers interest rates to 0%.

Even if there is savings and capital available, the companies that need it won't get it if government borrows it instead to finance wars, welfare, bailouts and dis"stimulus" packages.

Hence, our dilemma.

Why can't they get savings because the Govt lowers interest rates to 0%? Buy a T-Bill and get 0% or put it with a bank and get more.

How many more people would be willing to save if interest rates were at their normal, market levels? The fact that you don't get anything for saving is a huge discouragement to for people to save their capital.

Well I don't know. I don't many more really. Because I don't think many are really not saving at the moment, and in fact are saving more -- too much because they aren't spending.

Is savings really a problem with the banks? I don't think so. I think the problem is the asset side of their balance sheet is full of crap and that is what is driving down their equity, not a flight of savers.