Why are Banks not Lending?

Readers Question: why are banks still not lending despite the bail out and increase in money supply? If all this time they have taken risk, why cant they take risk anymore? They should have more borrowers now due to low interest rates,if they can help small business who need the money then growth can increase gradually. All the banks should pass the rate cut.

I wish my bank would pass the rate cut onto me! From the last 2.5% cut in base rates, my mortgage company Standard Life has cut their standard variable rate by 0.9% (or thereabouts)

There are a few reasons why banks are reluctant to lend

  1. Falling house prices. With house prices falling, banks could end up with large losses in event of repossession. If they lend a 100% mortgage for £100,000 and house prices fall 20% they will lose £20,000. When house prices are rising default is less important because they can sell house and even make a profit. This is why banks are requiring large deposit for loans and why people struggle to get mortgages despite
  2. Recession In a recession there is a greater chance that people will default on their mortgages / loans. Businesses are more likely to go under. Therefore banks want to be much more cautious about lending in case they lose their loan.
  3. Poor Balance Sheets. In the boom years, banks became highly leveraged. Basically this meant they lent a high % of their deposits. Banks like Northern Rock were borrowing to lend. These business strategies are now seen to be too risky so banks are trying to encourage a greater % of deposits. This is why they don’t want to cut rates. They feel they need to attract savers not borrowers.
  4. Lack of Finance. Banks are reluctant to lend to each other. There is a shortage of credit. Therefore, although credit is cheaper, it just isn’t there
  • It is argued that if banks do pass on the whole rate cut, then they will lose their depositers and therefore could actually have less funds to lend out.
  • However, government is putting pressure on nationalised banks to pass rate cut onto consumers.
By on February 15th, 2009

29 thoughts on “Why are Banks not Lending?

  1. The recent uncertain economic times and the integration of financial global markets have created a 24/7 financial investment environment. With computer driven stock exchange stock trading software the investment speculation takes on a new level. It almost becomes impossible to sort things out and reach any conclusions that will stand up in the next minutes of trading.

  2. Chance Korse writes: The renown credit rating firm Standard & Poor now have their own credibility dilemma. In their assessment of the U.S. credit standing, S &P produced a math error to the tune of about two trillion dollars ($2,000,000,000,000.00). Because of the international visibility in this matter, they were immediately challenged by people in the know and the math error was detected and S&P had no option but to accept the error. What other never discovered math errors have down graded other entities in the past and will so in the in the future? Another footnote to this, credit rated corporations pay S&P to issue credit ratings on the paying corporations, which is pure and simple a conflict of interest. So did USA Government pay S&P to issue the downgrading? And if not, who did? Also, S&P credit ratings are always after the fact, so why pay S&P for something that is already public knowledge? My name is Chance Korse and I welcome your insights into financial matters.

  3. Reasons banks will not lend::

    1. Because lending at 4.5% is not worth it.
    2. There balance sheet is still too shaky
    3. They must have cash reserves for the next wave of wrongdoing settlements
    4. They cannot meet the stress test if the lend with loss reserve

  4. Reasons banks will not lend::

    1. Because lending at 4.5% is not worth it.
    2. Their balance sheets are still too shaky
    3. They must have cash reserves for the next wave of wrongdoing settlements
    4. They cannot meet the stress tests if they lend without loss reserve

    Chance Korse

  5. The media has done an excellent job in uncovering how and why banks got wealthy during the lending go-go years. Corporate governance and leadership showed strong evidence of moral decay and the balance sheets ultimately collapsed. I said that in 2009 and I can say this again today. Chance Korse, Temecula, California

  6. Good debate on this very topical bank lending issue. By reading the commentaries, there are many reasons offered for why we think banks are not lending. The problem is the banks will not confirm any of the conjectures.

    Here is a new one: I have seen, in the media, the figure of $13 trillion that disappeared in the U.S. economy, of which $6.5 trillion was caused by the U.S. housing market bubble. This number has been floating around in the media lately.

    My position is that the major banks don’t have enough creative footnotes in their balance sheets to cover that kind of money. Assume there are 39 large financial institutions worldwide, that is $0.5 trillion per institution. While they are shoring up their real capital they have to use creative footnotes for the time being for the next two years. Lending money without a real cash reserve is not easy. Why? Because footnotes and cash are not the same thing. Chance Korse, Temecula, California, USA.

    1. Good debate on this very topical bank lending issue. By reading the commentaries, there are many reasons offered for why we think banks are not lending. The problem is the banks will not confirm any of the conjectures.

      Here is a new one: I have seen, in the media, the figure of $13 trillion that disappeared in the U.S. economy, of which $6.5 trillion was caused by the U.S. housing market bubble. This number has been floating around in the media lately.

      My position is that the major banks don’t have enough creative footnotes in their balance sheets to cover that kind of money. Assume there are 39 large financial institutions worldwide, that is $0.33 trillion per institution. While they are shoring up their real capital they have to use creative footnotes for the time being for the next two years. Lending money without a real cash reserve is not easy. Why? Because footnotes and cash are not the same thing. Chance Korse, Temecula, California, USA.

  7. Thanks to Internet we know exactly what the big banks are doing. In the past we had to trust what the banks told us. No more.

    When I was in college, the history books stated that there are three large interest groups that run the world we live in: Big Government, Big Business and Big Labor.

    What I have found out now, is that we actually have five large interest groups: adding Big Consumer (class action lawsuits) and Big Media (Internet) completes the equation of the fast moving power brokers that run the world we live in. What do you think?

    CHANCE KORSE,
    TEMECULA, CALIFORNIA, USA

  8. I use Google all the time and they are correct..Very interesting to see that labor and business has the same confrontational divide in the political arena in UK as they have in USA.

    When I was in college, the history books stated that there are three large interest groups that run the world we live in: Big Government, Big Business and Big Labor.

    What I have found out now, is that we actually have five large interest groups: adding Big Consumer (class action lawsuits) and Big Media (Internet) completes the equation of the fast moving power brokers that run the world we live in. What do you think?

    CHANCE KORSE,
    TEMECULA, C

  9. Google has been very helpful in presenting relevant subject matters at the door step of my research, even the ads are relevant and useful. Thanks to the Internet, closely interconnected issues to the economy are the the three major power brokers we learned about in in college there are three large interest groups that run the world we live in: Big Government, Big Business and Big Labor. What I have found out now, is that we actually have five large interest groups: adding Big Consumer (class action lawsuits) and Big Media (Internet) completes the equation of the fast moving power brokers that run the world we live in. What do you think?

    CHANCE KORSE,
    TEMECULA, C

  10. The right information that is relevant to research has imp[roved considerably thanks to search engines. Google has been very helpful in presenting relevant subject matters at the door step of my research, even the ads are relevant and useful.
    Thanks to the Internet, closely interconnected issues to the economy are the the three major power brokers we learned about in in college there are three large interest groups that run the world we live in: Big Government, Big Business and Big Labor. What I have found out now, is that we actually have five large interest groups: adding Big Consumer (class action lawsuits) and Big Media (Internet) completes the equation of the fast moving power brokers that run the world we live in. What do you think?

    CHANCE KORSE,
    TEMECULA, C

  11. Banks not lending? Google is helpful in presenting relevant subject matters at the door step of my research. Research regarding the banks financial position clearly shows poor basic banking fundamentals are still a huge problem. Their balance sheets are peppered with complex foot notes making it difficult to ascertain what is really going on. Over time they will eventually be able to show a straightforward balance sheet and able to lend money again.

    CHANCE KORSE,
    TEMECULA, CA

  12. Banks not lending? Yahoo, Google, and Wall Street Journal are all helpful in presenting relevant subject matters at the door step of my research. Lending mortgage money is very low on the banks’ list of priorities. The mortgage lending profit margin is very unattractive. They love 18% on loans. Research regarding the banks financial position clearly shows poor basic banking fundamentals are still a huge problem. Their balance sheets are peppered with complex foot-notes making it difficult to ascertain what is really going on. Fortunately, most top banking officials responsible for the banking mess are leaving through attrition or forced out. Over time, the banks will eventually be able to show a straightforward balance sheet and able to provide mortgage money money again. Not soon enough though.

    CHANCE KORSE,
    TEMECULA, CA

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