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Nation's banks not lending stimulus money, study suggests

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BY DAVID RESS

MEDIA GENERAL NEWS SERVICE

Published: March 6, 2009

Billions of dollars flooded into banks' coffers as the credit crunch gripped the U.S. economy last year, but only a fraction of that stimulus money is going back into the community as loans, regulatory records show.

Filings with the Federal Financial Institutions Examination Council and the U.S. Treasury covering last year's fourth quarter showed:

•The amount of new loans made was less than a quarter of the billions of dollars of new deposits banks received, as jittery consumers pulled funds out of the stock market and placed them in banks for safety.

•New loans generally were less than the amount of taxpayer money, when those sums were intended to fuel many times more loans.

•Loan totals generally rose far less than banks' holdings of securities - even the mortgage-backed securities that were at the center of last year's financial mess.

Consumer and commercial loans grew at some and shrank at others, as banks preferred to park their money by buying bonds and other securities.

"We're in a fairly deep recession," said C. Barry Pfitzner, an economist at Randolph-Macon College. "Banks are, and should be, more circumspect in loan approvals on any type of loan."

Net purchases of securities - mainly bonds - which are seen as safer than lending grew the most. Mortgage-backed and asset-backed securities, bonds that are repaid with payments from pools of mortgages or consumer loans, rose. Some of these types of securities proved troublesome to many banks last year because they contained so-called "toxic" loans.

"If they're purchasing new MBS, I only hope they've done their homework," Pfitzner said.

Capital One's chairman and chief executive officer, Rich D. Fairbank, said last month that he saw "compelling investment opportunities" in mortgage and asset-backed securities because of the wide gap between what they are paying and what other alternatives yield.

SunTrust spokesman Michael McCoy said SunTrust believes its purchase of $5.4 billion of mortgage-based securities during the quarter is helping lower mortgage rates, while the bank has expanded its efforts to help borrowers avoid foreclosure.

While banks are cautious these days, businesses are too.

They're cutting back where they can and that means their need to borrow is down, Chmura said, pointing to the drop of more than 2 percent in business and software sales nationwide during the last three months as a key example.

"It's a chicken-and-egg thing," Chmura said. "It's a recession, so banks are cautious; it's a recession, and businesses don't want to borrow. Which comes first?"

In its first report on how banks used their federal money, the U.S. Treasury blamed the slow economy for what it called a modest decline in lending. The report, released in mid-February, focused on the biggest recipients of the federal aid.

One of the smaller recipients, Union Bank & Trust, in Richmond, Va., which got its federal money just two weeks before the quarter's end, posted the biggest increase in lending. Its parent, Union Bankshares, received $59 million in federal money.

"We're working hard to get money out onto the street," said the bank's president, John C. Neal.

He said lending rose in January from its December and November levels, with mortgage loans up about 25 percent, to reach $50 million.

It's not easy to drum up demand, and the new capital doesn't give a license to loosen lending standards, he said.

But it does allow the bank to be a little more flexible - for instance, by exploring whether a five-year loan rather than a three-year loan might allow someone to qualify who otherwise wouldn't.

The federal money comes with a price, however. Banks must pay a 5 percent annual dividend back to Washington for the use of taxpayer money.

"We make a lot of loans at the prime rate, that's 3.25 percent, and I've got to get that money out there working," Neal said.

He said, roughly speaking, a dollar of capital translates to being able to lend four dollars.

Neal said the biggest demand for loans he's seeing is for mortgages - but much of that is people moving to take advantage of low rates by refinancing existing debt.

Randolph-Macon's Pfitzner thinks it will take some time before lending rises, in part because demand is soft and in part because banking needs to stabilize. He thinks the need for general stability makes the capital infusions a good idea.

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