The 'Banks Are Not Lending' Myth

An incessant refrain in today's news is that government must do something about these bad investments that banks and other financial firms have made, even if it involves unprecendented steps.  The reason for this is 'to get banks lending again'.

More specifically (and just this week):

"to jumpstart the secondary markets that support consumer and business lending" and to relieve conditions are "limiting their ability to lend" -- US Treasury¹

"a strategy to... restart lending" -- President Obama²

It's a myth. 

Banks are lending.  They are lending to businesses.  They are lending to consumers.  They are making real estate loans.  Consumer loans, especially, are experiencing healthy growth.







It's true that lending standards have tightened.  But that is a welcome development.  Lending standards had fallen far too low.  'Ninja' loans (No income, no job, no assets) and the like were irresponsible, at best.

But overall lending is higher than it was a year ago.  The rate of loan growth has slowed, but it is still growing. 

So if banks are lending to businesses, consumers, and for real estate, what is all this talk about banks not lending?

Banks are not lending to other banks.  Why is this such a crisis?  Because banks have long ago become dependent on such sleight-of-hand tactics as sweeps, repurchase agreements, and brokered deposits in order to meet their capital requirements. 

For example, in more normal financial environment, a bank in New York could 'borrow' money from a bank in Tokyo while the Japanese bank is closed and then 'pay' back  the loan at closing time in New York.  So the depositor's money can count as 'money in the bank' twice in a single day.  This, and other types of shenanigans complies with banking rules and has been going on for decades.

What has changed is now banks are doubtful that they can really know the financial health of the financial firm on the other side of the transaction. This, despite all the post-Enron regulation that was supposed to provide so much transparency.

Banks are lending, to just about anyone except other financial companies.  When you hear politicians or journalists talk about 'banks not lending' they are likely speaking of inter-bank loans.  If not, they are being either ignorant or deceitful. 

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Sources:

1. US Treasury. Treasury Department Releases Details on Public Private Partnership Investment Program.
Press Release tg-65. March 23, 2009.
http://www.ustreas.gov/press/releases/tg65.htm

2. The Associated Press. Part I of text of Obama's news conference.
March 24, 2009.
http://www.google.com/hostednews/ap/article/ALeqM5gkyWk2MK7xeDw2b1jPhFS6KsvPegD974ORSO0

All charts courtesy of St. Louis Fed

© 2009 Michael Cale