In an era of heightened attention and accountability for banks, many are wondering why there is so little lending activity between banks and consumers or small businesses. Billions of taxpayer dollars have been handed to banks with the goal of spurring lending activity again, yet the reported numbers don’t reflect any significant increase in lending business. In fact, most lenders reported loan volume has been decreasing in recent months. There are three main reasons why banks are still reluctant to lend:
- Applications Are Down: Part of the reason that fewer loans are being issued is that fewer loans are being applied for. Consumers are tightening their belts and depending less on consumer loans and saving money instead of spending. Businesses are downsizing instead of expanding. These factors create less overall demand for loans. In addition, mortgage rates have climbed about one full percentage point above their lowest point, reducing demand for the refinancing of home loans.
- Qualifying Is More Difficult: In a recent survey, 90% of lenders reported that the standards they use to determine whether an applicant qualifies for a loan are tighter than average. Many consumers who would have qualified easily a couple of years ago are now below the higher standards that banks are enforcing. Getting a credit card used to be easy for even starving college students, but almost half of the survey respondents reported that they have lowered credit limits and raised the standards for new credit card applicants. Most banks expect to keep lending standards tight through at least the middle of 2010.
- Creditworthiness Is Down: At the same time that banks have been looking for more credit-worthy borrowers, fewer individuals are remaining credit-worthy. This has been an extremely difficult recession and many consumers have seen their credit scores drop as a result of late payments and defaults on outstanding loans. Unemployment is a significant factor in this, as is the housing market which has seen record foreclosure levels over the past 18 months. Bankruptcy filings are up 35% in 2009 so far and that’s a number that is likely to get worse before it gets better.
- Banks Are Still Unsure About Toxic Assets: Even as there are signs of recovery in certain parts of the economy, bankers know that they have not completely eliminated the risks associated with toxic assets on their balance sheets. A Congressional Oversight Panel reported earlier this month that troubled assets on bank balance sheets could worsen, especially if the recovery isn’t swift. Toxic assets on balance sheets make it nearly impossible to determine the worth of those assets and because the size of the problem is difficult to identify, banks are hoarding cash to maintain capital requirements instead of lending to consumers and businesses. Smaller banks carry more risk associated with these assets, and we’ve seen over 75 “smaller” banks fail this year already.
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