One Reason Why Banks Are Not Lending

We talk about the worthless toxic assets on the banks' books. They cannot be sold, but they definitely are not worthless. They are still generating income – just not the amount of income they were originally believed they would produce. Here is an example:

Having recapitalized because of the write-downs of the toxic assets, the toxic assets continue to have an income stream to the banks (even though at reduced levels). The disproportionate write-down of the toxic asset compared to the income still generated by the toxic asset will leave some banks satisfied with their current income stream without additional lending. In uncertain times, no new loans mean no new risk.

Also a point to ponder on why the banks are not lending – are banks as unsure as the average investor about what will happen next?

Disclosures: None.
 

Comments

[helplessobs...:]

This post is short, insightful and informative. To all enterprises cash flow is king and as the author points out it has not stopped completely even though the toxic assets have been marked down. As these cash flows increase the banks will mark up the asset's value and these flows will be added directly to the bottom line.

2008 Oct 27 09:35 AM

[johnhaskell:]

why should banks lend? The Fed is doing it for them, at interest rates which do not take into account a long and deep recession. TARP funds are rationally better used to buy out the competition.

Keep in mind two things: this is the Administration that was in charge of the recovery from Katrina, and you can't spell "worst president ever" unless you start with a "W."

This will help you put ineffective policy responses into context.

2008 Oct 27 11:49 AM

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