Banks Healthier … and Lending Less

Yesterday, the Treasury released its first-ever monthly report on financial institutions that participated in its Capital Purchase Program (otherwise known by its alias, the Bailout). This snapshot of 500 banks' lending activity between February and March turned up a surprising result: Banks nuzzled up to the government trough aren't passing along that largesse to American consumers and businesses.

By the numbers, the total amount of outstanding loans was $5.237 trillion in March, as compared with $5.279 trillion in February. That's a drop of $42 billion over the course of a month. That amount should be small potatoes; collectively, CCP participants have netted $200 billion in aid from Uncle Tim. Among the top 21 lenders, the pullback was slightly steeper, with most of the drop coming from a reduction in commercial loans. Smaller local and regional banks make up the greater number of CCP participants but only transact a fraction as much of the lending business as the big boys. From February to March, their business lending was nearly flat, but their consumer lending, which can include everything from credit cards to student loans to home equity loans and lines of credit, constricted by nearly a full percentage point.

According to this CNN piece, banks claim a shortage of customers, maintaining that demand—especially for commercial loans—has slackened as firms delay big investments. This could be the case, or it could be an issue of (bank-imposed) tighter lending standards setting the bar too high for businesses to get their hands on some of that TARP cash. Or it could be—as is so often the case—some combination of the two.