Academic journal article ABA Banking Journal

Why a Lending Surge Won't Work

Academic journal article ABA Banking Journal

Why a Lending Surge Won't Work

Article excerpt

Congress has become increasingly strident in insisting that banks that received capital from Treasury lend that money.

The fact that the Capital Purchase Program was not intended to be used only for lending has been lost in the rhetoric. Hardly surprising since the program was a complete about-face from what Congress had authorized. Furthermore, the public, thanks to the consistent media labeling of the program as a bailout, which it's not, is angry at banks for not lending.

This is a myth. Data show that banks are lending.

The problem is that the economy is in steep decline, and people expect Washington to "do something about it." They should do whatever is possible and makes sense, but insisting that banks must lend more is folly.

There are two reasons why.

First, most of the brain-dead residential mortgage lending that touched off the economic free-fall was done by nonbank, largely unsupervised parties. The proper response to that is to try and contain the damage as much as possible, and then bring the unregulated under the kind of prudential supervision that banks are under. Not just mortgage brokers, but other key parts of the huge unregulated financial system created over decades.

The very rules that have helped make banks more stable are a check on reckless lending. Clearly there are cases where banks made marginal loans, and regulators were slow to question them--hence the increase in failures. Bankers are not perfect. But the banking system works.

Well-managed banks, like the two we wrote about in this space last month, want to make loans and are making loans. But they want to make good loans. To insist that banks like that do more is to say, "Make loans you normally wouldn't make--risk be damned. …

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