Thursday, August 19, 2010

It's A Miracle! Bank Loan Officers Say They're Starting To Lend Again

Posted Aug 17, 2010 09:40am EDT by Joe Weisenthal in RecessionBanking

Yahoo! Finance
By the looks of things, banks are still being uber-skittish with regard to lending, while plowing their money into government securities.

But at least according to those Senior Loan Officers surveyed by the Federal Reserve, these banks are slowly getting ready to lend again.

It's not dramatic, mind you, but across various categories, there's clearly a loosening bias, rather than a tightening bias. And demand is apparently picking up.

If lack of lending really was one of the key factors preventing a rebound (rather than merely a symptom), then this is definitely a trend to watch, and a reason to be a little hopeful.

Could this actually be the start of a real thawing that actually translates into meaningful economic traction?

It's possible.

Mike O'Rourke of BTIG theorizes as to what's going on: basically it's a response to mediocre earnings and the rapidly compressing yield curve (which makes the lend-to-the-government play less and less profitable).

What we believe is happening here is that banks are begrudgingly being forced back into banking by the market and investors. Think about when Q2 earnings season commenced last month, the banks set the tone with revenue misses on the top line as earnings beat on the bottom line. We would speculate that the banks will likely be punished again if they don’t exhibit improvement in coming quarters. The key problem during Q2 was the weakness of the capital markets business. It is safe to say that business has not picked up here in Q3. Investor’s don’t want to see these institutions operate as if they are in runoff mode not replenishing maturing loans with new ones, leading to that shrinking C&I chart depicted below. Likewise the banks can only use conservatism and prudence as a mantra for so long while they are releasing credit reserves, and keeping a $1 Trillion parked at the Fed for emergencies. In addition it is highly likely credit written here in 2010 is likely to be among the best vintages in a very long time. Instead of writing new loans the banks have been providing financing to the U.S. Government and the GSE’s by purchasing Treasuries and Agency MBS.

Hiding behind securities backed by the U.S. Government, explicitly and implicitly has been the “safe” way for banks to earn during the early stages of the recovery. As is clearly obvious, as these yields continue to compress the risk reward ratio will actually shift in favor of lending to a business for an actual spread rather than parking in 2 year Treasuries for less than 50 basis points. Finally, one last data point form the Fed Survey is that 22.6% of banks have increased their willingness to make consumer installment loans. Similar to the case for business lending the demand is not there yet. It is lagging business demand, but it is moving in the direction where it can stabilize in the coming months.


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