One of the mantras of the current financial crisis is the oft-repeated charge that "banks won't lend". This has been repeated so often that it is accepted as a universal truth and is usually spoken of with a slight amount of derision and anger, as if to say "How dare they take our money and not lend it out."
This conventional wisdom is supported to some extent by the most recent release of the Federal Reserve senior loan officer opinion survey on bank lending practices. This quarterly survey polls top lending executives across the U.S. to see if they are making it harder to get loans. The October survey showed that banks "tightened lending standards" in all loan categories over the previous three months.
Does This Claim Stand Up To Examination?
If we look at recent earnings reports from several large regional banks, we see loan growth at many of them.
SunTrust Banks (NYSE:STI) reported that average loans for the fourth quarter ended December 31 were $127.6 billion, up 5.4% on a year-over-year basis. Loan growth was $2 billion, or 6.3% on a "sequential quarter annualized basis".
Comerica (NYSE:CMA) reported that average loan growth in 2008 increased by 6% over 2007. This excluded loans in the financial services division.
Regions Financial (NYSE:RF) made $12 billion in new or renewed loans in its Q4. Ninety percent of these loans were to businesses and represented a 3% sequential growth rate.
KeyCorp (NYSE:KEY), the holding company for KeyBank, said that average loans and leases grew by $5.43 billion, or 13%, in the quarter. The growth rate benefited from the transfer of existing loans from the loans held for sale category to the loan portfolio.
Admittedly, the survey of banks above is not that scientific. If I searched enough I could probably find a list of banks that saw a decline in loan growth in their most recent quarter. Banks can also probably play some statistical tricks to show loan growth. (For more on examining a bank's books, check out Analyzing A Bank's Financial Statements.)
The Lesson Here: Don't Believe Everything You Read
The news media tend to sensationalize events rather than just report news. The phrase "banks won't lend" implies a bank not making any loans during the quarter. A bank can no sooner not make loans than not breathe, since the alternative to making a loan is parking funds in a low-return safe security that yields almost nothing. Is it possible that banks are now doing what they should have done all along, which is make loans to those able to pay them back? It seems that this is what we want them to do, so we can't fault them for finally doing it.
Also, investors should understand that the banks are not getting the TARP investment for free from the U.S. Treasury. The banks pay a 5% dividend every year to the taxpayer. Although some surveys and conventional wisdom seem to show difficulty in obtaining loans in the current environment, bank earnings reports provide some unscientific contradictory evidence.
Find out how economic capital and regulatory capital affect risk management. Read How Do Banks Determine Risk?