The Idea That Banks Aren’t Lending Anymore Is Ridiculous

One of the worst parts of being a money manager is that in order to stay on top of financial news one should really have CNBC on in the office constantly. There are many people on CNBC that I thoroughly enjoy (David Faber and Erin Burnett, to name a couple), but I say this because you also have to hear a bunch of garbage that people continually spew out of their mouths.

One of the things you constantly here nowadays is that “banks aren’t lending anymore.” Whether it is a politician who is upset about how the government’s money is being spent, or an economic doomsayer, this statement is simply untrue based on actual reported data (sorry, I’m a stickler for actual data). Depending on how strong a bank is right now, lending for the most part has either been increasing modestly, staying flat, or dropping modestly. Claiming that banks aren’t lending anymore implies that loan volumes have simply fallen off a cliff, but nobody making these accusations ever can back it up with any facts when pressed.

Take the fourth quarter earnings report from JPMorgan Chase (JPM) released today. Despite an economy that shrunk during the quarter, JPM’s total consumer loans rose by 2% or $10 billion, to $483 billion, between September 30th and December 31st. This is not an aberration. As we will see (and I will add more data to this post as it comes in) most banks will show similar numbers for the latest quarter.

Given that economic growth is negative and unemployment is rising, one could easily understand if lending dropped during a recession. After all, if the core problem was lax lending standards and those standards are being revised upward, lending should be going down, not up. Evidence of increases or simply a stagnation in loan levels goes against exactly what many are claiming (that the banks are hoarding capital).

It is certainly true that someone with a FICO score of 500 or 600 (sub-prime) might not get a loan in today’s environment, but that does not mean that banks aren’t lending. Instead, it means that banks are not giving money to people who likely won’t be able to pay it back. Isn’t that exactly what we want, given that the sub-prime mortgage crisis is what got us here in the first place?

Remember, numbers don’t lie but people do. For some reason too many people seem to want to blame the banks for more than their fair share, and that is saying a lot given that these institutions don’t exactly have impressive operating track records recently.

Full Disclosure: No position in JPM at the time of writing, but positions may change at any time

Update (1/16/09):

Consumer Loans Q4 2008 vs Q3 2008

Bank of America -2%, Citigroup -4% vs JPMorgan +2%

Makes sense given the relative strengths of each bank. In all three cases, loan growth is rising faster than GDP. Banks are lending, you just need to be a prime borrower to qualify (and the majority of U.S. consumers are in prime territory).

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2 Thoughts on “The Idea That Banks Aren’t Lending Anymore Is Ridiculous

  1. If we are talking about mortgages, I can assure you that there is very little lending going on, especially jumbo. My credit score can be considered a notch above prime and I am having difficulty refinancing. I tried to take advantage of these seemingly low fixed mortgage rates but my take is that those rates are fictitious and don’t reflect reality. I’m talking from personal experience and that of a couple of friends of mine in similar position (high credit scores).

    Another anecdotal evidence comes from my contacts at the U.S. branches of some large European banks. There is huge internal competition for capital within the banks, there are potential deals out there but unfortunately many projects and companies are not being funded. Each deal is being scrutinized like never before because there is more demand for loans than available capital (supply of loans) from the banks. The credit crunch continues. Banks need more help from the governments.

  2. Ruben, I wonder if there is no loans happening because of no money are available or because they’re locked out of fear.

    I don’t know the true answer, probably a bit of both, but I lean towards the second.

    Banks went from over-relaxed mode to over-protective mode and now aren’t investing even where they have to.

    A guy I know has a 10-year old business that is absolutely recession proof – his customers have actually increased lately – and he still doesn’t qualify for, like 4th or 5th loan, althogh he’s never been late with any of the prior ones and, given the nature of the business, very unlikely to be late in foreseeable future.

    Honestly, I think this is a great time to start a banking business, if you have the capital.

    And from what I hear some small regional banks are taking advantage of this situation and actually doing very well.

    In 5-10 years the banking landscape may not be as different as many are predicting now…there may be some new players that we haven’t yet heard of.

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