Banks aren't lending

[SEC=UGA]

Big profits, but not much lending

 

But the banks have been considerably less adept at making new loans, which could threaten the economic recovery when stimulus spending slows next year.

 

Consumer credit dropped in October for the ninth straight month, the Federal Reserve said this month, while loan balances at commercial banks fell at the fastest clip in at least 25 years in the third quarter.

 

Eight of the 10 biggest small business lenders posted smaller loan balances at the end of the third quarter, with loans falling 9.5% over the past year at PNC and 5.8% at American Express.

 

At Citigroup, the New York-based bank that is the biggest recipient of federal aid, loans outstanding fell by 15% in the year ended Sept. 30.

 

At JPMorgan Chase, widely applauded for avoiding most of the subprime landmines, loans fell 14% over the same period.

 

What banks say: The banks stress that they are working to rebuild their capital cushions at a time when losses on credit card loans and other borrowings are at all-time high levels.

 

They say loan demand is weak, as overextended consumers try to rebuild their own balance sheets.

 

And regulators, having dozed through most of a decade, are now stressing the need to make only prudent loans.

 

This is all plausible -- but it need not have mattered, Smick notes. Obama, he said, had an ample club at his disposal: He could have chosen not to accept repayment of TARP funds until unemployment started falling and other economic indicators turned positive.

 

"He had his chance to say no when the banks wanted to return the money," said Smick. "If you make them hold onto the TARP funds, you can say, 'I want you to lend that money out.'"

 

Instead, the administration was eager to extricate itself from toxic questions about government involvement in the economy. It accepted TARP repayment checks from Goldman Sachs, JPMorgan and numerous others in mid-June, less than eight months after they accepted billions in funds that officials said were intended to support lending.

 

This was far from the only bank-friendly decision by an administration that has, among other things, opposed proposals to break up the biggest banks for the sake of the safety of the financial system. Still, it left some investors scratching their heads.

 

"Policymakers were hellbent to get TARP money into the banks, whether they wanted it or not, and then they were hellbent to get the TARP money back out," said David Kotok, who runs the Cumberland Advisors investment advice firm in Vineland, N.J. "The government is acting counter to normalcy at every turn."

 

Obama knows he has public opinion on his side. At his first meeting with the bank CEOs in March, he reportedly warned the executives that the administration "is the only thing between you and the pitchforks."

 

The danger now is that the CEO summit will spur no meaningful action. Instead, Smick said, it could devolve into "just a good old-fashioned demagoging of the banks."

 

 

http://money.cnn.com/2009/12/12/news/econo...rtune/index.htm

Edited December 14, 2009 by SEC=UGA

[WaterMan]

What banks say: The banks stress that they are working to rebuild their capital cushions at a time when losses on credit card loans and other borrowings are at all-time high levels.

 

I can understand that. With so many people losing their jobs and getting their hours cut, credit loaners probably did lose alot of money. That's probably why they hiked interest rates up, so people will settle to pay back half of a much larger amount of money then they orignally borrowed.

[Grimm74]

Securitization market is still virtually closed. The banks in the past made loans and sold them off, so they can make more loans.

 

We can point the finger at the banks all we want but until that market opens, lending will be down. There is not much banks can do. Their hands are tied.

 

TARP was a mess. The government says here take the money. Then after receiving the money there was a whole populous bait and switch with executive pay restrictions. Why do we think they are all paying it back so quickly...

[muck]

I am involved in a transaction right now that is so complicated I cannot accurately explain it, simply because the the banks are not really providing much in the way of traditional, straight-forward financing.

[isleseeya]

apparently ( but not definitely) this may start to change little by little

 

we shall see

 

[westvirginia]

apparently ( but not definitely) this may start to change little by little

 

we shall see

 

 

From that article:

 

But they also insisted they are getting conflicting messages from Washington when they do try to make more loans. While the White house presses for more lending, regulators are cracking down on banks to lend more prudently and forcing them to keep larger cushions of capital to protect against future losses. That means there's less money available to lend.

 

You can't have it both ways...

[geeteebee]

Banks are lending.

 

Companies in decent shape can get a loan. Companies whose sales have declined dramatically and whose profits have turned to losses cannot get a loan. Companies that used to be able to borrow on their cash flow cannot get nearly as much credit extended to them as they used to. Hard assets can still get you a loan, albeit at lower advance rates than 2 years ago.

 

So what? This is exactly what everyone should hope would happen as part of an overall deleveraging environment. Prudent leverage extended to borrowers who can repay it. As Grimm mentioned above, with the securitization market virtualy closed, the voracious appetite for debt is not what it was, and that is not an entirely bad thing.

[Sugar Magnolia]

Banks are lending.

 

Companies in decent shape can get a loan. Companies whose sales have declined dramatically and whose profits have turned to losses cannot get a loan. Companies that used to be able to borrow on their cash flow cannot get nearly as much credit extended to them as they used to. Hard assets can still get you a loan, albeit at lower advance rates than 2 years ago.

 

So what? This is exactly what everyone should hope would happen as part of an overall deleveraging environment. Prudent leverage extended to borrowers who can repay it. As Grimm mentioned above, with the securitization market virtualy closed, the voracious appetite for debt is not what it was, and that is not an entirely bad thing.

 

Absolutely

[Ursa Majoris]

Banks are lending.

 

Companies in decent shape can get a loan. Companies whose sales have declined dramatically and whose profits have turned to losses cannot get a loan. Companies that used to be able to borrow on their cash flow cannot get nearly as much credit extended to them as they used to. Hard assets can still get you a loan, albeit at lower advance rates than 2 years ago.

 

So what? This is exactly what everyone should hope would happen as part of an overall deleveraging environment. Prudent leverage extended to borrowers who can repay it. As Grimm mentioned above, with the securitization market virtualy closed, the voracious appetite for debt is not what it was, and that is not an entirely bad thing.

Bingo.

[BeeR]

I am involved in a transaction right now that is so complicated I cannot accurately explain it, simply because the the banks are not really providing much in the way of traditional, straight-forward financing.

Buying a house eh?

[Jimmy Neutron]

Banks are lending.

 

Companies in decent shape can get a loan. Companies whose sales have declined dramatically and whose profits have turned to losses cannot get a loan. Companies that used to be able to borrow on their cash flow cannot get nearly as much credit extended to them as they used to. Hard assets can still get you a loan, albeit at lower advance rates than 2 years ago.

 

So what? This is exactly what everyone should hope would happen as part of an overall deleveraging environment. Prudent leverage extended to borrowers who can repay it. As Grimm mentioned above, with the securitization market virtualy closed, the voracious appetite for debt is not what it was, and that is not an entirely bad thing.

 

Exactly right.

[muck]

Had lunch with a former banker today (he primarily lent on real estate; he's been out of banking for five or six years fwiw). It is his understanding / opinion / view that:

 

* If a 'good' bank wants to lend money to a borrower so that that borrower can buy out / repay a loan at a failed bank that is currently controlled by the FDIC, then the 'good' bank will have to reserve more capital on that loan than if they made a new loan to some guy off the street for the exact same project. Reserves required would be 3% vs 1% simply because the loan is currently at a FDIC controlled institution. As a result, the FDIC is restricting the ability of good borrowers to finance good projects / businesses because once the FDIC controls a bank, borrowers no longer have the ability to draw on lines of credit or construction loans, etc.

 

* Any bank that has more than 50% of their loans tied to real estate is automatically on a "watchlist for failure" at the FDIC. This is something else that is keeping many 'good' banks from financing otherwise good transactions and/or refinancing good projects at failed banks.

 

* Industrial revenue bonds (a financing tool from the 1970s) may be the only real way to get big real estate projects off the ground.

 

* Commercial banking is dead for the next 2-5 years (primarily as it revolves using real estate as collateral at small and mid sized banks).

 

**************************

 

Sure there are exceptions to all of this and sure this primarily relates to real estate related opportunities ... but, much of the collateral for loans is real estate related ... and what a business owner can do if they can finance their real estate at 80% LTV is quite different than if they can finance it at a 50% LTV.

[westvirginia]

Banks are lending.

 

Companies in decent shape can get a loan. Companies whose sales have declined dramatically and whose profits have turned to losses cannot get a loan. Companies that used to be able to borrow on their cash flow cannot get nearly as much credit extended to them as they used to. Hard assets can still get you a loan, albeit at lower advance rates than 2 years ago.

 

So what? This is exactly what everyone should hope would happen as part of an overall deleveraging environment. Prudent leverage extended to borrowers who can repay it. As Grimm mentioned above, with the securitization market virtualy closed, the voracious appetite for debt is not what it was, and that is not an entirely bad thing.

 

And this was my point. It's not necessarily a bad thing that the banks aren't lending like they were five or ten years ago. But the politicians can't have it both ways - screaming and crying about banks not lending money when they want safer financial institutions.

[bpwallace49]

And this was my point. It's not necessarily a bad thing that the banks aren't lending like they were five or ten years ago. But the politicians can't have it both ways - screaming and crying about banks not lending money when they want safer financial institutions.

 

I really dont see it that way at all. I think the hollering is for banks to lend to people that have good credit and better collateral.

 

I beleive the safer financial instituition part is to restrict lending to risky/ poor candidates for loans, IE the subprime lending.

 

How is both ways when they want banks to simply be more responsible on who to lend to, yet still keep lending to qualified applicants?

 

Does being a safer financial institution mean stopping all lending to businesses?

 

My point is that there is a middle ground that needs to be struck. Being more prudent in your lending policies does not mean stopping all loans in general.

[geeteebee]

I really dont see it that way at all. I think the hollering is for banks to lend to people that have good credit and better collateral.

 

I beleive the safer financial instituition part is to restrict lending to risky/ poor candidates for loans, IE the subprime lending.

 

How is both ways when they want banks to simply be more responsible on who to lend to, yet still keep lending to qualified applicants?

 

Does being a safer financial institution mean stopping all lending to businesses?

 

My point is that there is a middle ground that needs to be struck. Being more prudent in your lending policies does not mean stopping all loans in general.

 

 

But banks aren't "stopping all loans in general." If you have collateral, you can get a loan.

[westvirginia]

I really dont see it that way at all. I think the hollering is for banks to lend to people that have good credit and better collateral.

 

I beleive the safer financial instituition part is to restrict lending to risky/ poor candidates for loans, IE the subprime lending.

 

How is both ways when they want banks to simply be more responsible on who to lend to, yet still keep lending to qualified applicants?

 

Does being a safer financial institution mean stopping all lending to businesses?

 

My point is that there is a middle ground that needs to be struck. Being more prudent in your lending policies does not mean stopping all loans in general.

 

You seemed to have missed the very first part of the post I was replying to. I was agreeing with GTB that banks are still lending to good risks with good collateral. The pendulum has swung back the other way and since bankers are being blamed (in large part) for the current issues, you can't blame them for being extra cautious. You can't excoriate them for making risky loans and expect them to not be "gunshy" for a little while, anyway.

[bpwallace49]

You seemed to have missed the very first part of the post I was replying to. I was agreeing with GTB that banks are still lending to good risks with good collateral. The pendulum has swung back the other way and since bankers are being blamed (in large part) for the current issues, you can't blame them for being extra cautious. You can't excoriate them for making risky loans and expect them to not be "gunshy" for a little while, anyway.

 

Read the following tidbit from the original article.

 

At JPMorgan Chase, widely applauded for avoiding most of the subprime landmines, loans fell 14% over the same period.

 

So at a bank that by and large, WASNT making outrageously risky loans and seem to have had a good set of indicators of what would identify a good candiate . . loans fell 14%. Why be extra cautious if you already the mechanisms in place to eliminate poor applicants from getting loans? I also saw that demand has fallen, but you hear every day about businesses that cant find loans.

 

Maybe people just arent going to the right banks, but to OVERcompensate and be TOO restrictive in lending chokes off growth as well . . . right? I believe the article also said that banks were recording RECORD profits now? Isnt that an indicator that maybe they are being too restrictive and should be a teensy bit less restrictive in lending policies? isnt there a middle ground where businesses can get a loan?

 

IMO there isnt only two end of the spectrum of perfect creditors and poor people that should never get a loan, the key is striking that middle balance, which "appears" to heavily tilt toward the perfect side of the graph right now . . .

[Ursa Majoris]

You seemed to have missed the very first part of the post I was replying to. I was agreeing with GTB that banks are still lending to good risks with good collateral. The pendulum has swung back the other way and since bankers are being blamed (in large part) for the current issues, you can't blame them for being extra cautious. You can't excoriate them for making risky loans and expect them to not be "gunshy" for a little while, anyway.

I'd rather they erred on the side of not lending than lending to bad projects

[dmarc117]

if the banks had to put every asset on the books, they'd be broke. all of them.

[Savage Beatings]

I think we should force banks to lend money to people whether they can pay it back or not.

[The Irish Doggy]

Read the following tidbit from the original article.

 

 

 

So at a bank that by and large, WASNT making outrageously risky loans and seem to have had a good set of indicators of what would identify a good candiate . . loans fell 14%. Why be extra cautious if you already the mechanisms in place to eliminate poor applicants from getting loans? I also saw that demand has fallen, but you hear every day about businesses that cant find loans.

 

Maybe people just arent going to the right banks, but to OVERcompensate and be TOO restrictive in lending chokes off growth as well . . . right? I believe the article also said that banks were recording RECORD profits now? Isnt that an indicator that maybe they are being too restrictive and should be a teensy bit less restrictive in lending policies? isnt there a middle ground where businesses can get a loan?

 

IMO there isnt only two end of the spectrum of perfect creditors and poor people that should never get a loan, the key is striking that middle balance, which "appears" to heavily tilt toward the perfect side of the graph right now . . .

 

Yeah, but look at the next line...

 

At JPMorgan Chase, widely applauded for avoiding most of the subprime landmines, loans fell 14% over the same period.

 

What banks say: The banks stress that they are working to rebuild their capital cushions at a time when losses on credit card loans and other borrowings are at all-time high levels.

 

Now I'm no banker, but Banks have to worry about more loses than just subprime mortgages (Muck's post above about lunch with a banker). With high unemployment there will be other loses in credit cards, car loans, etc. The risk of new loans in the current environment has increased substantially from a few years ago, so they need more reserves to comfortably lend. The formulas that banks use to decide how much capital reserves are needed are based in part on the level of risk associated with their assets. Compound that risk with the uncertainty of assets (especially property) falling in value across the country and you can see why things are slow right now.

 

Plus you have the point other made above about the securitization market. Part of the reason credit was so easy to get not so long ago is that lenders could unload mortgage backed securities to wall street. Lenders sold their loans which freed up funds to make more loans. You close that loop off, and you get what we have here.

 

Washington is right to cry about the lack of credit. Its what makes the world move. Unfortunately there are no easy answers here IMO. They can't force banks to lend, the Fed is already giving money away, and the stimulus is higher than many voters like. I don't know how much more can be done.

[bpwallace49]

Yeah, but look at the next line...

 

 

 

Now I'm no banker, but Banks have to worry about more loses than just subprime mortgages (Muck's post above about lunch with a banker). With high unemployment there will be other loses in credit cards, car loans, etc. The risk of new loans in the current environment has increased substantially from a few years ago, so they need more reserves to comfortably lend. The formulas that banks use to decide how much capital reserves are needed are based in part on the level of risk associated with their assets. Compound that risk with the uncertainty of assets (especially property) falling in value across the country and you can see why things are slow right now.

 

Plus you have the point other made above about the securitization market. Part of the reason credit was so easy to get not so long ago is that lenders could unload mortgage backed securities to wall street. Lenders sold their loans which freed up funds to make more loans. You close that loop off, and you get what we have here.

 

Washington is right to cry about the lack of credit. Its what makes the world move. Unfortunately there are no easy answers here IMO. They can't force banks to lend, the Fed is already giving money away, and the stimulus is higher than many voters like. I don't know how much more can be done.

 

That makes a lot of sense. Well said.

[The Holy Roller]

I'd rather they erred on the side of not lending than lending to bad projects

 

Indeed.