The Wonk Room

Banks Leading The Profit Charge Are Cutting Back Most On Lending

According to an analysis by the Wall Street Journal, “lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.” The Journal found that “the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.”

Leading the cutback in lending are three banks that last week eagerly declared themselves profitable. Two of them — Goldman Sachs and JP Morgan Chase — have also announced their intention to pay back their TARP money soon. The Journal provided this chart to illustrate the situation:

Coinciding with this report, a senior administration official told the Financial Times that “strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest”:

He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.

This last point is important, and ties back to the Journal’s analysis. If a bank is truly healthy and can pay back TARP money while maintaining lending, more power to it. If, however, a bank is paying back TARP because it wants to get out from under the program’s restrictions — while not lending and clinging to other government funded rescue programs — that’s problematic.

For instance, Wells Fargo (which received TARP money) has posted a profit and maintained lending. If it announces a desire to exit TARP, the administration should seriously consider the offer. However, this is going to make it transparently obvious which banks are in the best shape. The administration will then have to decide whether the others will ever be anything more than zombies — limping along thanks to government support without actually doing any good — and be honest about the need to take them over and wind them down.