Of Course The Banks Aren't Lending. There's A Depression On, Fool.

Yesterday, Kevin Depew of Minyanville wrote a column entitled Five Things You Need to Know: Under TARP, Neither a Borrower Nor a Lender Be. Depew discusses the lack of new lending by TARP (Troubled Asset Relief Program) recipient banks:

According to Bloomberg, 51 lenders who got TARP money reduced total loans by $92.9 billion, or 2.5 percent, in the fourth quarter from the prior quarter. Their smaller peers who didn’t apply for capital or declined cash infusions curtailed lending by $1.87 billion, or 1.3 percent, the article said. Fifth Third Bank (FITB), Capital One (COF) and KeyCorp (KEY) were among those receiving TARP funds that curtailed lending the most.

Depew goes on to say that this lack of new lending is "...puzzling the Fed, baffling Treasury and mistifying most economists." I doubt that the situation is quite as mysterious to the Fed and Treasury as Depew believes. Every Friday, the Federal Reserve Board releases an estimate of the aggregate balance sheet of US commercial banks flamboyantly known as "Assets and Liabilities of Commercial Banks in the US" or simply H.8. H.8 gives voluntarily provided data from the largest 30 US banks and statistical estimates from a sampling of smaller institutions. While I'm certain there is a fair amount of error in H.8 components, it should be sufficient for qualifying industry trends.

In bankworld, loans, securities, and cash are assets, deposits and borrowing are liabilities, and never shall the two meet. Below is a chart constructed from the historical H.8 data for all commercial banks:

It's important to note that equity in this context is more of an indicator of a trend in aggregate net worth, as opposed to capital adequacy. For example, the Federal Reserve Board does not include loan loss provisions in its asset tabulations. Nevertheless, a disturbing trend can be observed from September '08 until the present. It's readily apparent that liabilities have increased relative to assets. which can be seen below, in the complement of the above chart:

Considering that much of the TARP funds are booked as equity due to the fact that Treasury is buying preferred stock, the decline in bank equity becomes more interesting. Furthermore, loan defaults are almost guaranteed to increase as a result of the current unemployment levels, further reducing bank capitalization. Which finally brings me to my original point: Banks are hoarding their TARP proceeds due to adequate capitalization concerns. If I'm a bank president who is watching my capitalization ratios decline due to charge-offs and non-accruing loans, do I want some more of the hair of the dog that bit me? Nope.

I am certain the Treasury and the Fed are well aware of this. Nobody who is familiar with Fifth Third could honestly expect them to increase lending anymore than you would expect a drowning man to ask for barbells. Instead, I believe that these public complaints about the lack of new lending are merely a backhanded means of reassuring us of bank soundness. Who would ask a troubled bank to lend, right? Why Depew and other media types don't know this or won't say this is beyond me. More bad loans are precisely what we don't need. Instead, perhaps the media's efforts would be better spent looking at other bank indiscretions like jacking up interest on credit card debt, paying dividends with bailout proceeds and doing little to encourage savings.

1 comment:

  1. "Why Depew and other media types don't know this or won't say this is beyond me." I have said this. Repeatedly. For more than two years. In fact, it is the very point of the piece. I'm not sure how much clearer I could have been than in these sentences that for some reason were omitted from your critique. "There are only two things you need to know about the financial crisis to be able to successfully cancel your newspaper subscriptions and ignore the evening television news: 1) there is too much debt in the system, and 2) it is being supported by too little real income. That is all ye know and that is all ye need know."
    -Kevin Depew