Why aren’t banks lending?

Date posted: December 20, 2011

Even for someone with a good credit rating, it’s difficult now to get a loan. Why? N.C. State University economist Mike Walden explains.

“Well … if you look at the numbers, the good news is lending is up over the last couple of years. It actually went down during the recession. It’s now up over the last year about 5 percent. So that’s good.

“But the growth in lending is still well below what we typically see after recessions — after, for example, the 2001 recession, lending went up by about 30 percent.

“Several reasons (are) given for why lending is … slow and why it’s hard to get loans. One reason given is, simply, there aren’t as many folks out there and businesses out there wanting to … get loans. Households, for example, are paying down on their debts. So they’re not borrowing as much. They’re being much more frugal in spending. Businesses have reacted to the recession by cutting back on spending plans. So the so-called demand for loans probably isn’t there.

“Then on the supply side, if you will, clearly … credit standards have been tightened. This has been done by banks and other lenders on their own. But also we have new federal legislation that has resulted in higher lending standards.

“And then lastly … very interestingly the Federal Reserve has a role to play in this. The Federal Reserve is actually paying interest to banks if they keep their money back in the vault rather than lend it out.

“Now the Fed says they’re doing this in order to maintain a floor on interest rates, but some people say, ‘Hey, Fed,’ this means that some banks are simply content to earn that Fed interest rate rather than putting that money out on the street.”

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