There is a rather ridicules line of thought going on regarding the banking industry: if you receive TARP funds then lending is supposed to increase. Not only was this an incredibly stupid line of thought to sell the TARP package both then and now it completely flies in the face of what is actually happening out there in the economy. In short, this is not a time when banks will start lending; it's a time when lending contracts.
From today's WSJ:
Lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.
Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.
Those 13 banks have collected the lion's share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America Corp. and Citigroup Inc., each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: U.S. Bancorp, SunTrust Banks Inc. and BB&T Corp.
First, note the anecdotal evidence from every Beige book in the last year as well as every lending officer survey in the last year:
In Every Beige book issued in 2008 has indicated credit conditions were tightening and loan demand was decreasing.
January 16, 2008:
Reports from banks and other financial institutions noted further declines in residential real estate lending, and lending to the commercial real estate sector was generally described as mixed. Some Districts reported lower consumer loan volumes, whereas the volume of commercial and industrial lending varied. Most Districts cited tighter credit standards.
March 4, 2008:
Most Districts reporting on banking cite tight or tightening credit standards and stable or weaker loan demand.
April 16, 2008:
Financial institutions in many Districts indicated some deceleration in consumer loan demand, tightening in lending standards, and deterioration in asset quality
June 11, 2008:
Lending activity also varied across Districts and market segments, though tighter credit standards were reported for most loan categories.
July 23, 2008
In banking, loan growth was generally reported to be restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending.
September 3, 2008
Most Districts reported easing loan demand, especially for residential mortgages and consumer loans; lending to businesses was mixed.
October 15, 2008:
Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions
December 3, 2008:
Lending contracted, with many Districts reporting reductions in residential, commercial and industrial lending and tightening lending standards.
In addition to the Beige Book, the Federal Reserve issues a Senior Loan Officer Survey every three months. These reports stated the following:
January 2008:
In the January survey, domestic and foreign institutions reported having tightened their lending standards and terms for a broad range of loan types over the past three months. Demand for bank loans reportedly had weakened, on net, for both businesses and households over the same period.
April 2008:
Compared with the January survey, the net fractions of banks that tightened lending standards increased significantly for consumer and commercial and industrial (C&I) loans. Demand for bank loans from both businesses and households reportedly weakened further, on net, over the past three months, although by less than had been the case over the previous survey period.
July 2008:
In the current survey, large net fractions of domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months. In particular, the net fractions of banks that had tightened credit standards on consumer loans increased notably relative to the April survey.
October 2008:
In the current survey, large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months. The net percentages of respondents that reported tightening standards increased relative to the July survey for both C&I and commercial real estate loans, as did the fractions reporting tightening for all price and nonprice terms on C&I loans.
Let's take a look at some year over year charts from the St. Louis Federal Reserve
Total bank credit outstanding is decreasing, as is
Revolving credit,
Non-revolving credit
consumer credit
C and I loans (commercial an industrial)
And Real Estate Lending
In short, lending does not increase when the economy is in a recession and the banking industry is going through its worst (self-inflicted) crisis in over 70 years.