Ask the Economist: Why isn’t our bank lending?
November 7, 2008 by Michael DonnellyPosted in: Ask the Economist, Economy, Government, In this week's e-newsletter, Latest news & views, Management issues
It’s because banks are caught in a squeeze. They have limited resources and few good options for raising more.
So instead of making more loans, they’re furiously trying to get outstanding loans off their balance sheets.
And the bailout doesn’t appear to be helping. This survey, taken both before and after the bailout plan was passed, shows that banks have continued to tighten lending standards and restrict access to credit. In fact, credit may be tighter than it’s ever been before.
Percentage of banks tightening their lending standards
So if your bank is making borrowing much more difficult, you’re by no means alone. Over 80% of banks are doing that, and 60% tightened access to credit just three months ago.
All this information comes from the Federal Reserve, which surveys banks four times per year. The results are just about the most important news we have on the economy. Why are banks having trouble raising funds? Nearly all say the rates at which they can borrow (from other banks and investors) have increased. Our survey data goes back only to 1990, but we’d probably have to go back to the 1980 recession, or farther, to find this level of panic in the banking sector.
Percentage of banks reporting higher borrowing rates.
What’s the impact? Businesses and consumers are feeling the pinch. Car loans are tougher to get, and so are credit cards. In fact, consumer lending is falling to unprecedented levels. During the recessions of 1990 and 2001, banks pulled back credit an average of 15%. Now, half of all banks are unwilling to make consumer loans, and that’s reducing spending.
In our weekly “Ask the Economist” feature, our resident Economist, Mike Donnelly, tackles your questions about the economy. If you’ve got a question — and no topic is too big or small — you’d like him to field, e-mail us at economist@pbp.com or leave your queries in the comments section.
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Tags: Bailout, Balance sheets, Banks, Federal Reserve, Lending practices
November 10th, 2008 at 5:28 pm
We are a small special district that may be looking to borrow $3,000,000 in the near future for infrastructure improvements. We may issue bonds or borrow directly from a bank, it depends on what the best deal we can get. Has this type of lending dried up as much as consumer? What are the current rates for this type of debt?
November 11th, 2008 at 11:08 am
The vast majority of the change has been to the consumer. This makes sense because consumers’ #1 asset is normally their house, which has gone from a source of credit to something they can’t use to leverage. So credit cards, auto loans, home loans, school loans, revolving credit and all other consumer lines of credit have been pinched the most.
Next on the list is all those business’ that directly touch the consumer. Auto companies lines of credit have shriveled. Small companies are next, many times their backstop is their CEO’s personal line of credit, or some real estate asset.
Banks themselves are more in the middle of this continuum. Some banks themselves cannot borrow nor lend, as their capital has been decimated. In Japan we called these banks the walking dead. These zombies will soon die, be taken over, or get an infusion of government ownership.
At the very end would be government. Yes, government’s revenue is shrinking as job losses loom, but the power to tax is unrivaled by anything else in our economy. If you can’t get a loan, that would say far more about the bank you are dealing with, rather than your district.