It's all the Fed's fault. Or so an op-ed in today's WSJ says. Interest rates are rock bottom right, and banks are sitting on hoards of cash. Most of it is sitting in large commercial banks as excess reserves. So why aren't they lending it out to small and medium size enterprises (SMEs)? Why does the near zero interest rate have anything to do with the credit constraints?
When a bank lends out money, they typically open lines of credit to borrowers. Since they don't know for sure how much the borrower wants or when he/she wants it, it creates uncertainty for the bank to know what it's future cash positions will be. So the bank looks for credit from another bigger bank in case they need funds.
But, the interest is so low, the bigger banks are not willing to offer credit for such a low return, risks being what they are today (50 smaller banks have failed so far this year.). So the big guys find other safer places for their money. Interbank loans in March 2011 were only one third of what they were in May 2008 before the crisis hit. Tthe low rates intended to boost the economy have instead restricted lending to SMEs, who are the primary job creators.
When a bank lends out money, they typically open lines of credit to borrowers. Since they don't know for sure how much the borrower wants or when he/she wants it, it creates uncertainty for the bank to know what it's future cash positions will be. So the bank looks for credit from another bigger bank in case they need funds.
But, the interest is so low, the bigger banks are not willing to offer credit for such a low return, risks being what they are today (50 smaller banks have failed so far this year.). So the big guys find other safer places for their money. Interbank loans in March 2011 were only one third of what they were in May 2008 before the crisis hit. Tthe low rates intended to boost the economy have instead restricted lending to SMEs, who are the primary job creators.
