Are Banks Ready to Lend?

One common phrase in the newswires is that ‘Will the government programs get banks to start lending?’ This is a curious question and it is much appropriate to ask if the programs allow banks to fully restore credit loss and if confidence is fully returned with right credit appetite?

What I realized after the massive liquidity injection in the past months is the large increase in bank assets, estimated to be around US$120bn increase (+67%) in cash assets, including bank reserves held at the Fed, aimed to offset the strain in the funding markets. There was an US$64bn jump in residential mortgages and a US$14bn jump in commercial mortgages, which is the kind of assets growth that most observes are usually associated to when they ask if banks are going to lend.

With what have been done so far, I am sure that LIBOR will be strongly pulled towards the rates that money is available through government programs and possibly will also halt the credit contraction now taking place in the market, but it is unlikely to expand bank balance sheet until prices stabilize.

With huge multi-hundred point swings in the DJIA becoming the new norm, it reflects the extreme uncertainty felt by investors and businesses. Some even argue that the whole host of actions taken by Treasury and the Fed Reserve has the unintended consequence of contributing to the very fears those actions were intended to calm.

Housing and consumer spending were overdone during the past decade and it will take time to clear the excesses. Likewise, with the leveraging up of financial assets tied to housing and the consumer were also extremely overdone and this will take a considerable financial resources to work toward a resolution.

Even banks flush with cash, there is still far less tolerance for risk, particularly in parts of country where housing prices are falling rapidly. Banks are taking more seriously on 5-Cs i.e. Conditions, Credit, Collateral, Capacity to Repay and Character) in approving loans and tighter lending requirements mean credit will likely remain constrained for quite some time.

Over-extended consumers are well-aware they can no longer rely on rising home values and a ready line of credit to support their spending, evidently as housing starts continued to move lower, pushed by the sharpest decline in single-family activity since late 2006.

In short, I do not look for near-term improvement.