Economic Updates

Why Banks Aren’t Lending:

Weak Economy, Regulatory Uncertainty

U.S. banks got hammered last week on concerns the sovereign debt crisis in Europe coupled with slow growth and a weak U.S. consumer are setting the stage for another financial crisis. U.S. banks still have some troubling legacy assets on their balance sheets but for the most part they are in much healthier shape then back in 2008, says John Garvey head of U.S. banks and capital markets at PricewaterhouseCoopers. "The banks have made pretty significant steps in the last couple of years to improve their stability in terms of their funding sources, in terms of capital."

If banks are better shape then why aren't they lending? Wasn't the point of TARP and the rest of the bailouts to ensure banks could lend and support the economy?

Despite a slight improvement in the Fed's most recent survey of senior loan officers, bank lending remains stunted for several reasons, Garvey argues, including:

1. Underwriting standards have improved.

2. Changes in consumer behavior. "People are paying down their debt, people are not taking on a lot of debt."

(These first two changes are long-term positives for U.S. fundamentals but in the near-term, "it's a cocktail for weak loan demand for the foreseeable future," he says.)

3. Larger companies are sitting on record amounts of cash don't need the money. Plus, they're not investing more because of the weak economy.

4. Banks are reluctant to lend to "marginal borrowers" in this weak economy.

5. Regulations rules have not been written yet. All this uncertainty means companies "hesitate to invest" and become "cautious," according to Garvey.