Bank Lending Still Lags, Report Says

Correction April 16, 2009

We said, "Regulators will assess whether the banks have the capital to withstand this more negative forecast [during the stress test], and if it's determined they don't, they'll have two months to raise capital from private sources." In fact, the banks will have six months to raise the needed capital.

The overall volume of lending at the nation's largest banks declined slightly in February, according to a Treasury Department report. How are banks doing in terms of meeting political demands to free up credit?

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ROBERT SIEGEL, host:

Lending by America's big banks dropped in February. The decline comes despite the billions of dollars the government injected into the banking system to support lending. A report released by the Treasury Department today says 12 of the nation's largest 21 banks showed declines in lending while nine showed increases. NPR's John Ydstie joins us to talk about that and about the stress tests the banks are undergoing. Hi, John.

JOHN YDSTIE: Hi, Robert.

SIEGEL: First of all the government injected billions in capital into banks to boost lending and obviously the effort was not as successful as they had wanted it to be.

YDSTIE: No, it wasn't. The government certainly would've liked to see the numbers go up but the Treasury statement points out that the recession was really intensifying in January, or from January through February. So fewer businesses were asking for loans to build new plants or to merge or to produce more goods, and the Treasury said the decline would have been worse if it hadn't injected all that money into the banks.

SIEGEL: Now, we just heard from Chris Arnold about more foreclosures, but I gather one bright spot in the Treasury report is the jump in mortgage lending.

YDSTIE: Right, up more than a third overall. Now a very big chunk of that is for refinancing, but that's a bright spot because it's most likely lowering monthly payments for people, making mortgages more affordable and providing a little extra disposable income for people to spend.

SIEGEL: Of course there's still the question of whether the banks are healthy enough to lend. For the past few months their regulators have been putting them through stress tests to check them out and today the White House promised, and I quote, "Transparency on some of the results of those stress tests," so said Press Secretary Robert Gibbs. John that's not the most transparent statement one could imagine.

(Soundbite of laughter)

YDSTIE: Some of the results. Yeah. It's not really clear yet exactly what we're going to learn. But this whole issue is on a lot of people's minds. On the one hand, the fear is that if you make too much information available to the public, it'll become clear that some banks are weaker than others, which could cause a loss of confidence and a run on some of those banks.

SIEGEL: Which would make the bank weaker than others.

YDSTIE: Absolutely. Exactly. On the other hand not providing enough evidence can lead to rumors, which can often be even more damaging than facts.

SIEGEL: But if the White House - Gibbs did indicate that there will at least be some information provided once the stress tests are completed and analyzed.

YDSTIE: Exactly. And the top regulatory official I talked to today pointed out that the Federal Reserve has already said that sometime late this month or early in May the regulators will provide an aggregate readout of the findings of these stress tests. This source also said that individual banks will put out information on the results and then the Fed will provide a template for interpreting the results in the form of a white paper.

The banks have been told not to divulge the results of these stress tests along with their earnings reports, which are coming out before the end of the month, because they don't want the information to come out in a piecemeal fashion that could lead to confusion.

SIEGEL: I want you to remind us what these stress tests actually consist of. What is the - what is a bank's equivalent of running on the treadmill?

YDSTIE: Well, we don't know all the details but essentially what regulators are doing is conducting an examination of the bank's strengths and weaknesses, not unlike the ones they do normally, but in this case they're doing it under two scenarios. One is using current average forecasts for the economy going forward and another that shows the economy getting much worse.

Regulators will assess whether the banks have the capital to withstand this more negative forecast. And if it's determined they don't, they'll have six months to raise capital from private sources. If they can't do that they'll be required to take government capital, or presumably if they're a lost cause they'd be taken over by the government and liquidated or sold. So things could get even more interesting in the next few weeks.

SIEGEL: Thank you, John.

YDSTIE: You're welcome, Robert.

SIEGEL: NPR's John Ydstie.

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