June 9, 2011 |
This story is being co-published with msnbc.com.
The final scene in the movie Too Big to Fail , based on New York Times reporter Andrew Ross Sorkin's behind-the-scenes account of the financial crisis, shows Federal Reserve Chairman Ben Bernanke (played by Paul Giamatti) talking with then-Treasury Secretary Henry Paulson (portrayed by William Hurt).
The scene takes place in September 2008 after they had just arm-twisted some of the nation’s biggest banks into taking $125 billion in government bailout money as part of a last-ditch plan to stop a financial meltdown.
Part of the deal was that the banks would reopen their lending windows, easing a credit crunch that threatened to worsen an already frightening economic slowdown.
Bernanke asks, somewhat plaintively, whether the banks will hold up their end of the bargain and use the money to make loans to businesses and consumers.
“Of course they will,” Paulson responds.
Even if the conversation didn't really happen that way, many in and out of government supported the bailout on grounds it would boost lending by banks.
But it didn't and it still hasn't, even though the biggest banks long ago paid off their bailout money with interest.
Recent reports from the Federal Deposit Insurance Corp. show that bank lending declined again in the first quarter of this year. Since June of 2008, the volume of loans outstanding has fallen in 10 of 11 quarters, and the only reason it grew during the first quarter last year was because of an accounting change.
All told, bank lending has declined nearly 9 percent since March 2008, according to an analysis by the Investigative Reporting Workshop.
Total loans off by 9 percent in three years
By the time Paulson’s Troubled Asset Relief Program began handing out its billions in assistance, lending already had begun falling in part because of weak demand in a faltering economy and in part because banks and their regulators were trying to stem the tide of losses resulting from the collapse of the housing market.
Lending often softens during recessions but usually rebounds fairly quickly. That hasn’t been the case this time around. The FDIC said that last quarter’s decrease was the fifth-largest quarterly decline since it began tracking the numbers 28 years ago.
Some have blamed banks for unnecessarily cracking down on borrowers.
That doesn't make sense to Greg McBride, senior financial analyst at Bankrate.com. “This notion that, well banks don’t want to lend, that’s a little like saying the fast food place doesn’t want to sell hamburgers. It’s nonsense," he says."That’s how they make a living. But, at the same token, a lot of them have their regulators whispering in the ear that,‘You’ve got to build your capital cushion.’ Well, on the one hand, they’re saying you need to lend more and on the other hand they’re saying you need to build your capital cushion. You can’t do both at the same time.”
Home loans, unsurprisingly, are down 13.5 percent in the past three years. Loans to businesses are off by 18.5 percent.
Developers hardest hit by lending slowdown
By far the biggest decline has been in the area of loans for real-estate construction and development. Lending in that category has fallen by more than half, and builders and developers are having a hard time finding money to back their projects.
"Basically it's been bad, and it's stayed at bad," says Michelle Hamecs, assistant vice president for housing finance at the National Association of Home Builders.
Hamecs also says builders are being told that regulations are making it difficult for some banks to make loans for acquisition, development and construction (ADC). Bank regulators don't allow banks to make construction and development loans totaling more than 100 percent of the bank’s capital.
“We're also seeing the case, too, where lenders are bumping up against their 100 percent of capital requirement on construction loans, (and) examiners are telling them not to make any more construction and development loans,” Hamecs says. “In that case, loans are being pulled; loans are just not being made."
Development, construction lending doomed many banks
From the perspective of the banks, it is perhaps easy to understand why they are cautious about making new loans to finance real-estate development. After all, it is those loans that have brought down many of the 377 banks that have failed since the beginning of 2008.
Mike Larson, a real estate analyst at Weiss Research in Jupiter, Fla., says, “They’ve lost a lot of money on these loans. There are a lot of troubled banks still out there … and if you look at a lot of the failures that we’ve had, many of those failures do stem from making loans to developers.”
For example, Hillcrest Bank of Overland Park, Kan., failed in October 2010 at an estimated cost to the FDIC of $302 million.
When it reviewed the failure, the FDIC’s inspector general concluded: “Hillcrest failed because its board of directors and management did not effectively manage the risks associated with the institution’s significant concentration in ADC loans. From 2005 to 2008, Hillcrest’s board and management aggressively grew the bank’s ADC loan portfolio. Many of the loans originated or acquired during this period were outside of the bank’s local business area. This strategy greatly elevated the institution’s risk profile and its vulnerability to an economic downturn.”
The inspector general has reached similar conclusions in dozens of reports on bank failures, likely making construction and development lending the leading cause of bank failures.
It also is true that some of the decline in construction lending results from lower demand. Home sales continue to be soft and the large overhang of foreclosed homes and “underwater” mortgages mean that even if banks were willing to lend to developers, the markets in most cities would have trouble absorbing any new houses.
And no one quite knows when things will improve.
Hamecs says, “I think what we are forecasting is for things to be down through this year. We are looking for things to pick up next year and better times in 2013, just kind of generally."
Banks profits improve, loan write-offs shrink
Despite the softness in lending, overall bank performance indicators seem to point to a continued, slow recovery from the depths of the financial crisis.
Banks made $29 billion in the first quarter of this year, the biggest quarterly profit since the second quarter of 2007, the FDIC reported. Much of the improvement occurred because banks are setting aside less money to cover projected loan losses.
According to the Workshop’s analysis, troubled assets fell to $302 billion in the first quarter, down from $322 billion at the end of December and $382 billion on March 31, 2010. The Workshop adjusts troubled assets to account for problem loans covered by federal guarantees. A change in how banks reported that data in the first quarter may have overstated the actual decline.
As a result, the number of banks with more troubled assets than capital declined to 379 at the end of March, compared with 389 on Dec. 31 and 411 a year ago.
Meanwhile, the FDIC reported that it has 888 banks on its “problem list,” an increase from 884 at the end of 2010.
Workshop intern Eric Holmberg contributed to this story.
Graphics by Melanie Taube, Investigative Reporting Workshop