Big Bank Lending on the Decline
February 22, 2013 in Economics
As I have been harping on about in these pages, one of the main concepts behind the Federal Reserve’s idea of quantitative easing was to improve lending to stimulate the U.S. economy.
The Fed bought troubled assets from the big banks and provided the banks with funds to lend to their customers. The idea was that once banks had ample cash on their balance sheets, they would lend to businesses; and from there, businesses would spend on expansion and hire more people. But this hasn’t happened nearly to the degree hoped.
Actually, bank lending activity in the U.S. economy is bleak. Businesses are not borrowing as much as one would have expected after the Federal Reserve expanded its balance sheet to almost $3.0 trillion.
According to data compiled by Credit Suisse Group AG, the average loan-to-deposit ratio for the eight big banks in the U.S. economy fell from 87% in the fourth quarter of 2011 to 84% by fourth quarter 2012. Comparatively, in 2007, their loan-to-deposit ratio was 101%. (Source: Bloomberg, February 20, 2013.)
Big banks like JPMorgan Chase & Co. (NYSE/JPM) and Citigroup, Inc (NYSE/C) are lending in the U.S. economy at their slowest pace (as measured by a percentage of deposits) in five years. JPMorgan had the lowest loan-to-deposit ratio at 61% in 2012, compared to 66% in 2011. This means that for every dollar of deposit the bank has on hand, it lent $0.61 of it.
Other big banks like Bank of America Corporation (NYSE/BAC) are also lending at a much slower pace than they did before. In 2012, the bank’s loan–to-deposit ratio was 84%, substantially down from a loan-to-deposit ratio of 92% in 2011.
Dear reader, the issue at hand of banks lending less than they did in 2011 will not be fixed by printing more money, as the Federal Reserve has done through quantitative easing. The problem is that the businesses and individuals in the U.S. economy are scared to borrow and banks have … Read More