Are banks lending or not, and if not, why not? I have addressed this issue many times before but the question has come up again.
Please consider an Email from a “Louisiana Bank Director”.
“LBD” writes …
Mish, I am a Director of a small community bank in North Louisiana. I have read your comments that banks are not lending and I am curious how you arrive at this conclusion.
Loan demand at our bank is good and we never stopped making loans. Granted we stayed true to our loan policy and never exceeded loans that were out of policy of more than 7%. I talk with other community bank lenders and they say that their loan demand is also good.
The one challenge our bank has is reducing deposits. Even with the exceptionally low interest rates that are being paid for deposits, deposits are still increasing. Apparently the general public is extremely nervous about preservation of their capital and are not putting money in the stock market for the dividend yields are far better than money market rates or even CD rates.
So my question is, “What banks are you referring too when you state that banks are not lending?”
Best regards, LBD
US bank lending falls at fastest rate in history
Dear LBD, on February 17 the Telegraph reported US bank lending falls at fastest rate in history
David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.
Here is a chart of total bank credit that shows the plunge.
TOTBKCR – Total Bank Credit – All Commercial Banks
There was a spike in the middle of the recession (assuming it is over), and a spike now. Neither is sustainable. That spike in March is an outlier, perhaps related to reclassifying student loans.
Total Consumer Credit
As with total bank credit, this action is unprecedented, and it shows no signs of recovery, real or imagined.
So to answer LBD’s question, “What banks are you referring too when you state that banks are not lending?” ….
Answer: The US banking system in Aggregate.
LBD, Please do not think your bank, or any small bank, (perhaps any one bank no matter what size) is representative of the US banking system.
Too Many Deposits
The most interesting aspect from LBD’s Email is this statement.
“The one challenge our bank has is reducing deposits. Even with the exceptionally low interest rates that are being paid for deposits, deposits are still increasing. Apparently the general public is extremely nervous about preservation of their capital and are not putting money in the stock market for the dividend yields are far better than money market rates or even CD rates.“
Yep. Consumers do not want to spend and they do not want to invest in the stock market, either, and rightfully so in my opinion. I think fair value on the S&P; 500 is about 500. Even a drop to 850 would be a huge plunge from here.
And if consumers do not want to spend, pray tell why would businesses want to expand? I suggest, in aggregate they would not.
How “Discouraged” are Small Businesses?
Let’s review an Atlanta Fed Survey on small business lending practices. Please consider Atlanta Fed asks: How “Discouraged” are Small Businesses?
The Federal Reserve Bank of Atlanta Asks How “Discouraged” are Small Businesses?
Here are some Insights from an Atlanta Fed small business lending survey.
Many people have noted the decline in small business lending during the recession, and some have suggested proposals to give incentives to banks to increase their small business portfolios. But is a lack of willingness to lend to small businesses really what’s behind the decline in small business lending? Or is it the lack of creditworthy demand resulting from the effects of the recession and housing market distress?
The results of our April 2010 survey suggest that demand-side factors may be the driving force behind lower levels of small business credit. To be sure, when asked about the recent obstacles to accessing credit, some firms (34 firms, or 11 percent of our sample) cited banks’ unwillingness to lend, but many more firms cited factors that may reflect low credit quality on the part of prospective borrowers. For example, 32 percent of firms cited a decline in sales over the past two years as an obstacle, 19 percent cited a high level of outstanding business or personal debt, 10 percent cited a less than stellar credit score, and 112 firms (32 percent) report no recent obstacles to credit.
Banks Want To Lend
The report should bury the idea that banks do not want to lend.
Outside of the overbloated construction industry, businesses simply do not want to expand. With rising health care costs (Please see Double Digit Health Insurance Hikes Crush Small Businesses), and with excess capacity and tepid consumer spending why should businesses expand.
The moral of the story is as I have stated many times over the past two years. Banks are willing to lend but credit-worthy businesses do not want to borrow. Indeed businesses in general do not want to borrow.
Of the 9% of business owners who blame the banks, how many of those do you think need to look in a mirror and admit a failing business? I suspect all of them.
Bernanke Worried Over Job Scarcity, Bank Lending
Inquiring minds are reading Bernanke Says Job Scarcity a Concern
June 3, 2010
Lending to small businesses is declining, making it more difficult to counter the persistent problem of high unemployment, Federal Reserve Chairman Ben Bernanke said on Thursday.
Bernanke said policymakers have largely succeeded in stabilizing the U.S. financial system and economy over the past two years but the scarcity of jobs is a concern.
“I raise this issue here because healthy small businesses, including start-ups as well as going concerns, are crucial to creating jobs and improving employment security,” he told a meeting at the Chicago Fed’s Detroit branch organized to discuss the financing needs of Michigan’s small businesses.
Bernanke noted that loans to small businesses dropped from nearly $700 billion in the second quarter of 2008 to about $660 billion in the first quarter of 2010. He conceded it was hard to tell exactly why.
“An important but difficult-to-answer question is how much of this reduction has been driven by weaker demand for loans from small businesses and how much by restricted credit availability,” Bernanke said.
Reasons Small Businesses are Reluctant to Borrow
- Consumers tapped out
- Concerns about Obama’s Health Care legislation
- Concerns about higher taxes
- Poor sales
- Lower prices for goods and services
- Higher prices for some inputs
Reasons Banks are Reluctant to Lend
- Existing capital constraints
- Fear of more regulation and changes in capital requirements
- Few creditworthy borrowers
- Expected future writeoffs on credit cards, commercial real estate, consumer loans, home equity loans, and residential real estate
The reason LBD struggles with deposits appears to be lack of credit worthy borrowers. In the case of other banks it is capital concerns, expected writeoffs in commercial real estate, credit cards, or residential real estate.
In a world awash in overcapacity, there is simply no good reason for businesses to expand. For cash strapped consumers deep in debt, out of a job or fearing losing their job, there is no reason to want to borrow.
“Bernanke noted that loans to small businesses dropped from nearly $700 billion in the second quarter of 2008 to about $660 billion in the first quarter of 2010. He conceded it was hard to tell exactly why.”
Good grief. As explained above, it is crystal clear why businesses do not want to borrow and banks in general are reluctant to lend.
It would behoove Bernanke to get out of his Monetarist Ivory Tower and read analysis from bloggers. Hells bells, he is not even reading excellent materials put out by the Atlanta Fed.
Mike “Mish” Shedlock
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