Weak Lending Continues to Slow Recovery

Banks continue to show their disdain for Main Street as they posted their sharpest decline in lending since 1942, even though the bonus levels of the largest banks are projected to top 17% with profits of $55 billion.The Federal Deposit Insurance Corporation found in its quarterly report that while top-tier banks are recovering quickly, the rest of the banking industry is still suffering. This weak lending will slow any prospects we have for growth in consumer spending and jobs.Commercial banks and savings institutions insured by the FDIC reported an aggregate profit of $914 million in the fourth quarter of 2009, a $38.7 billion improvement from the $37.8 billion net loss the industry sustained in the fourth quarter of 2008, but still well below historical norms for quarterly profits. More than half of all institutions (50.3%) reported year-over-year improvements in their quarterly net income.

But the news was not good for all. About one-third of all institutions (32.7%) reported net losses for the quarter, compared to 34.6% a year earlier. For the full-year, banks reported net income totaling $12.5 billion -- up from $4.5 billion in 2008. At the end of December, there were 702 insured institutions on the "Problem List," up from 552 on Sept. 30.

Sixth Consecutive Quarter Of Declines

Yet with these improving profit numbers, especially at the big banks, total loans and leases declined by $128.8 billion (1.7%) during the quarter. This is the sixth consecutive quarter in which the industry's loan balances declined. Loans to commercial and industrial (C&I) borrowers declined by $54.5 billion (4.3%) and real estate construction, and development loans declined by $41.5 billion (8.4%).

FDIC Chairman Sheila Bair encouraged institutions to "lend using a balanced approach" and not "over-rely on models to identify and manage concentration risk," but she also does not want banks to "automatically refuse credit to sound borrowers because of those borrowers' particular industry or geographic location."

Yet even though big banks are now showing profits and paying big bonuses, they are still not stepping up to the plate and increasing their lending. While they enjoyed a taxpayer bailout, they don't seem to show any sign that they need to help the taxpayers out now that the banks are back on their feet.

'Negatively Impacts On Spending'

So how does this decline in lending impact our prospects of a full recovery from this recession? Celia Chen of Moody's Economy.com said this continued "restriction on consumer credit negatively impacts on spending." Since consumer spending has been the driving force for 70% of the U.S. economy, continued weakness will impact all consumer-related industries and will slow job growth.

Moody's expects spending to rise by just 1.4% this year, which is better than the decline we've seen in the past two years, but still about half the pace we see in a normal economy of close to 2.5% to 3%. Given the current economic conditions, Moody's anticipates that jobs won't recover their 2007 levels -- the last peak in jobs -- until 2012. That prediction is based on soft lending with about 1% increase in lending to individuals from current levels. Moody's expects lending to be weak this year, which means spending will be slow. That in turn will keep job growth weak.
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