Sluggish Loan Demand Spells Economic Trouble Dead Ahead

An ongoing war of words has characterized the frustration among borrowers and lenders.  Those seeking funds frequently complain that "Banks aren't lending".  They're right.  Lenders complain that regulators have tied their hands by imposing much stricter lending standards.  They're right, too.  Unfortunately, this has led to a stalemate, which is precluding economic growth.

Marko's Take?  The problem is the lending market is BI-LATERAL.  The solution is to remove onerous restrictions on banks AND stop bailing them out!  Let shareholders assume the risk.  Let management assume the risk.  Get Washington OUT!

Paul Volcker, backed by President Obama, recently proposed an excellent partial solution to this isssue:  prohibit banks from money-making activities, such as running proprietary trading desks and sponsoring in-house hedge funds.  In so doing, banks will have no option but to make money by LENDING!

Bankers responding to the January 2010 "Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices" indicated that residential loan standards are still contracting.  In addition, consumer demand for mortgage loans continues to decline.

Demand for businesses and households across all major categories of loans weakened over the past 3 months.  Of the survey's respondents, 25% reported a decrease in inquiries about new or increased credit as opposed to 13% that saw an increase.

A substantial number of the respondents reported that credit card limits had been decreased and that fewer new cards were issued.

The decrease in lending, whatever the reason, is impacting bank earnings.  SunTrust, an Atlanta-based institution said its fourth quarter interest income, the revenue from lending, FELL 2% from the third quarter and 18% from a year earlier.  However, profits from lending increased as a result because SunTrust has to pay less interest on deposits.

BB&T had fewer loan losses, so its earnings rose 5% to $1.5 billion, as the result of its purchase of failed Colonial Bank last fall.  The bank's loan book rose 7% to $109.7 billion, but without the acquisition the portfolio would have shrunk.

While higher profits are welcome, it's better to generate revenue from core lending growth than from lower-loss provisions.

Without a dramatic turnaround in the lending activity of banks, the economy cannot grow.  Unfortunately, with the economic recovery now appearing to sputter, this is a most worrisome sign that the Double-Dip is square ahead.

Marko's Take