One might think that 159 bank failures in the last two years would be the primary concern to Sheila Bair.

Unfortunately, that is not the case as noted by Bloomberg in FDIC’s Bair Concerned Banks Making Only ‘Safest Loans,’ Urges More Lending

Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending.

“There needs to be well-managed risk-raking to get the economy going again,” Bair said today in a Bloomberg Television interview at the White House, prior to a meeting of bank chief executive officers with President Barack Obama.

So Why Aren’t Banks Lending?

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

For proof, inquiring minds are digging for facts in the latest Fed Senior Loan Survey.

Please consider these charts.

Demand for C&I; loans from small firms

Lending Standards For Small Firms

There you have it. 85.5% of banks responding to the survey have lending standards that basically remained the same yet 44.6% of banks report moderately weaker demand for loans, with only 8.9% reporting moderately stronger demand for loans.

There is plenty of money available for lending. However, there are fewer businesses wanting loans, and fewer still credit worthy businesses who want loans. That is what the data shows.

Visualizing Bank Failures

http://vimeo.com/moogaloop.swf?clip_id=8160811&server=vimeo.com&show_title=1&show_byline=1&show_portrait=0&color=&fullscreen=1

The video above is from Visualizing Bank Failures (2008–2009)

Three Takeaways

1. Acceleration: There were four failures in the first six months of 2008, followed by another 22 failures in the next six months. By January of 2009, there were 21 failures in the first three months of the year, followed by 138 been April and last Friday.

2. Magnitude: Failures in the past two years have cost the Depositors Insurance Fund an estimated $57B. The IndyMac failure of July 2008 accounted for $10B alone, followed by BankUnited at $4.9B and Guaranty Banks at $3B.

3. Spatial Correlation: There is a significant amount of spatial correlation in California, Georgia, Florida, Texas, and Illinois. These states account for 77% of the total costs to the Depositors Insurance Fund. Furthermore, most of the losses in California and Georgia were concentrated highly around a few urban centers.

There is lots more background information about bank failures in the above link.

By encouraging banks to lend when demand for loans is dropping and credit risk is high, Sheila Bair is recklessly encouraging still more bank failures.

Mike “Mish” Shedlock
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