As reports come in that bank lending is at its lowest levels in decades, the major banks like Bank of America (NYSE:BAC), Citibank (NYSE:C) and J.P. Morgan (NYSE:JPM) are being pressured to take up some of the slack left from struggling regional and local banks, which are already beginning to be hit with growing commercial loan defaults, which will escalate throughout 2010 and probably into the first part of 2011.
Although some are saying this is hindering the economy, the truth is, as far as small business owners go, those that qualify for loans have already received them, and possibly some that even shouldn’t have.
What that means is the demand for loans in general isn’t there, which is a major reason there aren’t near as many being originated by the banks.
For small banks it would be a disaster to lend at this time when prior business loans are already defaulting at over a 5 percent clip, and also with it projected to get much worse as the year goes on.
FDIC Chairman Sheila Bair has called on the larger banks to step into the gap, but that’s a ridiculous request. The major banks have been so criticized by the Obama administration for laxity in their practices, that to now pressure them to become enablers of businesses which aren’t in positions of growth or to pay back their loans is ludicrous at best, and reckless.
This is enough for banks to hold on to their customers’ money until things turn around; and they should do that, no matter who pressures them. Pressure is now coming for political reasons and that can’t be what determines the lending practices of the banks at a time like this where we haven’t really experienced a recovery of any kind, contrary to assertions made by the U.S. government and mainstream media outlets.
A secondary reason large banks don’t have a large incentive to loan is they get their overnight money for close to nothing, and then can let it sit there at the Federal Reserve making a profit with no risk to it. In an economic time like this that beats everything else.
Major banks have made a lot of mistakes, this is one they shouldn’t make. The idea of offering risky loans with the government behind the push is a clear sign of desperation from Obama and his team. They should have just left the market to clear things out in the first place, now their stuck with their trillions doing absolutely nothing to create jobs, which is what this is all about.
The Obama administration is willing to allow the major banks to make this types of loans which could cause a lot of harm in the long term in an attempt to make things better for the mid-term elections. This is what this is all about, as it otherwise makes no sense at all.
