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
- 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
- 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.
- 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.
- 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.
“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”
-Or maybe, the banks stop lending to make the prices and the market collaps. By doing so, they can repossession properties as people do not have money to pay mortgages, and they have a win win situation! They get the property back, the people who borrowed the money are (at least partially) still in debt (but have no place to live) and now the banks can start lending again to make prices rise again, thus selling the repossessioned properties for higher prices again!
Although your commentary is dated February 23, 2009, you assessment and questions are relevant today. As long as the banks are using strategic presentations of their balance sheets, peppered with long-winded footnotes to obscure their accounting gimmicks, we don’t know what the true situation. One thing is for sure, at least in the U.S., that $13 trillions went missing in the general economy of which $6.5 trillion went “puff” in the housing market. The banks hope over time to recoup the missing trillion dollars. In the meantime they try to “look as good as they can”. In any settlement, insurances claims, or otherwise, fessing up to “funny” balance sheets, etc.,stalling is the strategic method to spread the damage over time. Chance Korse, Temecula, California, USA.
In short:
Banks do not stop lending because prices and economy are going down. In fact, exactly the opposite is true:
The prices and the economy is collapsing because the BANKS STOP LENDING!
For an eyeopener, watch the movie on this link:
http://video.google.com/videosearch?hl=en&q=money%20masters&um=1&ie=UTF-8&sa=N&tab=wv#
Very good article. Should be read by one and all
What is so infuriating is that Gordon Brown chose to give the banks huge sums of money to help lubricate the economy, only to forget to put in a clause compeling them to lend it!
Try being a small business owner with clients going bust and shortterm cash flow problems. In my industry the big winners are the offshore companies who are being bank rolled and are now mopping up the business left right and centre.
By-by British business – sold down the river by the man who sold all our gold!
what does price elesticity of supply measure? what is the main factor that influences price elesticity of of supply?
explain how the study of economics mith be benficial to a history major.
what does price elesticity of supply measure? what is the main factor that influences price elesticity of of supply?
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All the media about banks not lending is true but there are other sources of funding. SBLC’s, pension funds, insuance companies, oil companies, overseas money… Its out there,and we need help gettingthe word out there. 815-608-4334 Mike
All I have to say is that getting a loan right now is impossible!! My customers can not get funding, so they will not be able to buy there products from me? I have tried to get funding with our great credit to offer leasing to own the products for customers that are in a pinch!! Not a chance… I think the banks are starving out the country and buying up all the “lost dreams” bankrupted property’s and businesses for penny’s on the dollar with the money they have stolen!
Banks dont want to lend now as they wait for an increase in the interest rate coming up later. As they expect the economy starts recovering, they will push up the interest rate and lending, consequently they get a better profits from there instead of lending now with a low rate. So, what are they doing with their money now? => They invest them in speculative investment for example shares, or they just simple invest it overseas.
Three Reasons:
1. Because lending at 4.5% is not worth it.
2. There balance sheet is shaky
3. They can’t meet the stress test
I think Falling house prices and Poor Balance Sheets are the key factors for not lending money to customers. Because the price is continue to fall, they just dont have any confidence to lend.
The banks get a bail out tax pay out from us, but wont lend it to the hard working public, but give it as a bonus for doing, not a lot.
When I consider the “falling housing market” and “poor balance sheets” I slowly remember what it is like to live the American life. Folks, it’s really simple. What I recommend from a personal financial standpoint, is to consider savings plans and setting up multiple checking accounts at your bank in order to budget your money efficiently. Trust me, you will find yourself prosperous.
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.
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. Chance Korse.