What Happened to Lending

In the popular press and in everyday conversation we hear that banks that received TARP money are not lending. As usual, there is a grain of truth to this statement. According to Bloomberg,

"Fifty-one lenders who got TARP money reduced total loans by $92.9 billion, or 2.5 percent, in the fourth quarter from the prior quarter...Their smaller peers who didn’t apply for capital or declined cash infusions curtailed lending by $1.87 billion, or 1.3 percent. "

Some people have the impression that these banks are doing no lending or that they have sharply curtailed lending. Of course, lending is down. There is a lack of demand from credit worthy applicants and standards have undoubtedly risen. A Sandler O’Neill & Partners analyst, Kevin Fitzsimmons, recently said, “I think everyone’s standards have increased, so you’re looking tighter at a loan application and probably rejecting more than you used to.” I suppose we could go back to lending to anyone and everyone in absurd amounts, but that would just be going back to the cause of the crisis in the first place. We cannot look at 2005 and 2006 as the standard of normalcy in lending. Even throughout the 1990s there was a huge increase in credit. Who is to say what is normal?


Many will have anecdotal evidence that banks have sharply curtailed lending, but it does not stand up to reality. The Treasury department recently stated, "In sum, loan activity was resilient in the face of the worst economic downturn in decades."