Bank Lending Declines Just 1.4% in Q4: Was the TARP Instrumental?

Here is a graphic depicting the change in lending volume for the largest banks receiving TARP funds:

Graphic courtesy of the WSJ

So the obvious assessment many will make from this chart is that these banks have received billions in TARP funds, and are refusing to increase their lending activity for some selfish and/or pernicious reason.

However let's be mindful of the following:

Lending is a for profit activity, it isn't an altruistic activity that banks do for free, so if banks are indeed pulling back on lending they probably have a legitimate business reason for doing so. Why else would they pull back from something that is a bread and butter profit generator? Not to mention the fact that it's perfectly reasonable to pull back on lending when you're dealing with rapidly rising loan defaults, a weakening economy, leverage issues, capitalization issues, etc, etc.

We're coming off of a credit bubble, so it's intellectually dishonest if not fatuous to compare present day lending volumes with the lending volumes of 2002 - 2006, it's the functional equivalent of criticizing the banks for not behaving as they did during an era of rampant irresponsibility. Better yet certain politicians can't have it both ways: they can't lambast the banks for bad behavior during the credit bubble era, while simultaneously criticizing for not currently lending as they did back then.

As banks increase their lending standards, require more documentation and begin to behave more responsibly overall, etc, lending volume will decrease, however the loans that are originated are going to be much less likely to default. Again, it doesn't make sense to criticize the banks for doing the things that will lead to a more sustainable way of doing business.

In truth you can't make an assessment around how many loans a bank "should" be originating just based on the % change in lending volume, you also have to look at loan defaults, capitalization levels, lending standards, needed reserves for bad loans, etc, etc. Once you have all of that data you may be able to accurately determine whether or not bank ABC has pulled back too much, is lending too much, is lending properly, etc, etc.

Simply noting a decline in lending volume is nothing more than a red herring.

But perhaps there is another way to look at it: if it weren't for the TARP funds it's very likely that there would've been more bank failures, and that some banks would've had to be put some extreme restrictions on lending. As a result it probably makes more sense to look at things in terms of the delta between the decline without the TARP and the decline with the TARP, a measure that would undoubtedly show that TARP did in fact enable lending to increase even if it still decreased overall.

Overall the real problem is the way in which the TARP program (and banking bailouts in general) have been sold to the American public, namely: the idea that the reason for the cash infusions it enable the banks to increase lending, as opposed to providing them with the funds they need to remain solvent. While it's understandable that the former is a bit more appealing to the electorate, it does the entire country a disservice to misrepresent something and then push the banks to behave in accordance with the misrepresentation.

Finally let's not forget that lending only decreased by 1.4% from Q3 to Q4, a relatively small decline all things considered. Not to mention the fact that a pull back in lending and a return to more conservative lending standards are a good thing, as both will help the economy recover and put us on more solid ground on a go-forward basis. Let's not forget that we're in a crisis caused by excessive lending.

For some additional information here is a link to a chart depicting the amount of TARP funds received by various banks, a link to an article discussing the decline in bank lending, and a link to another article discussing political interference when it comes to TARP funds/bank bailout decisions.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Jake Berzon:]

What I generally see looking at that chart is that the banks that benefited the most in $ terms from TARP have increased their lending the least in % terms. I see this as a gross inefficiency in the way that TARP has worked.

Feb 03 09:23 AM

[Deehena:]

A lot of folks still don't get the main objective of the TARP. It is to keep these big banks in business and functioning so that the economy does not totally implode. This article does a fine job of explaining just that.

Feb 05 11:57 AM