The Facts About Bank Lending and Credit Availability
Banks have incentives to make loans that become earning assets
A recent National Federation of Independent Businesses study reported that 91 percent of business owners surveyed reported that they were able obtain the credit they wanted or they were not interested in borrowing.
- Banks have incentives to make loans that become earning assets – particularly those who accepted TARP funds. Through lending they generate revenue to pay the Treasury for the interest expense and warrants on the capital, which will increase in value as banks make money and their stock rises.
- Regulators are also asking for tighter lending standards and banks are complying by making loans to creditworthy and responsible borrowers. Banks have also reported increased regulatory pressure to maintain (and even raise) capital-to-asset ratios, diminishing the capacity to make new loans.
- According to the most recent (1/12/2011) Federal Reserve Beige Book results, “Business continued to be cautious regarding capital spending, which held the volume of new commercial and industraial loans at low levels…Consumer loan demand remained weakened overall…Lending standards remained relatively restrictive for most types of consumer and business loans, although reports suggested modest ongoing improvements in overall credit quality.”
- A November 2010 National Federation of Independent Businesses study reported that 91 percent of business owners surveyed reported that they were able obtain the credit they wanted or they were not interested in borrowing. Only three percent of respondents reported “financing” as their top business problem.
- With decreased real property values, the underlying value of the collateral pledged as security against loans has diminished, complicating credit opportunities for borrowers.
- Another important factor to consider is that today most new credit is from traditional bank lending, as non-bank credit has dramatically declined. While banks have been lending, they cannot offset the dramatic fall-off of credit outside the banking industry. Thirty years ago, banks provided about 60 percent of all credit – today traditional bank lending provides less than 30 percent.
- Despite the weak economy there are still very strong borrowers, and California banks are working hard to assure that customers get the credit that they need and deserve.