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Pain For Banks On Both Sides Of The Pond

I've been asked repeatedly what is going on in U.K. banks, with double digit declines in Royal Bank of Scotland , Barclays , and single digit declines in Lloyds.

The answer is, shareholders in those companies have the same fears that shareholders of large banks here do: massive dilution and further significant write-downs.

The UK Prime Minister has indicated the government would be announcing new measures to "resume the normal function of lending" to the private sector.

Read: More capital injections are coming into U.K. banks, in the hope they will use the money to do more lending.

Why? The U.K. government, like the U.S. government, is worried that without more intervention bank lending will continue to shrink.

But here in the U.S., there is growing debate about the limits of government intervention. The reason banks are not lending is not because they don't want to, it's because:

1) Deteriorating credit quality is a strong motivation to limit new lending growth, and

2) Banks need more deposits so they can lend more (i.e. people need to save more)

And that's just the supply side. On the demand side, loan demand is not INCREASING, it is DECREASING, both here and in the U.K.

That is not a bad thing. Corporations and households have too much debt already and need to deleverage.

The bottom line: government is not going to create an artificial demand by creating a false supply. Let us start by building up capital and increasing savings.

And to everyone--Sheila Bair on down--who angrily say to the banks, "What did you do with all the TARP money?," the correct answer is, "We used it to survive."

    • FDIC's Bair: TARP Funds Should Buy Banks' Bad Assets

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Questions? Comments? tradertalk@cnbc.com

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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