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Why The Banks Aren't Lending

There's plenty of complaints that the banks aren't lending, but the Fed's quarterly bank loan survey clearly indicated that the problems are much deeper than that.

Here's a few stats from the just-released survey:

  • 55% have tightened credit standards
  • 40% have reduced the size of home equity loans
  • 35% have trimmed credit card limits

As for loan demand: it continues to weaken for both businesses and households

So the "just go out and lend" mantra is somewhat silly in this context.

Banks are preserving capital to address their huge losses, they have tightened credit standards because they are worried about future losses, and loan demand itself is down!

Banks will lend more when this reverses: when they get their hands around the size of the losses, when creditworthiness improves, and when their capital positions improve, either by more deposits or more direct capital infusions.

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