Despite Cash Injection, Banks Cautious On Lending

Treasury Secretary Henry Paulson issued a subtle warning Monday to the banks about to receive up to $250 billion in taxpayer money.

"Our purpose is to increase confidence in our banks and increase the confidence of banks, so they will deploy — not hoard — their capital," he said.

But in the short term, it's not clear how many banks will actually heed Paulson's call. On a conference call last week, John Thain, CEO of Merrill Lynch, said his firm would sit on the money for the next several months.

A Cushion Of Money

"I think we will have the ability to redeploy that on a combined basis going forward, but at least for the next quarter, it's just going to be a cushion," he told investors.

Some banks would like to stash the money for short-term business reasons. Together, the top nine have written down bad assets by several hundred billion dollars, and they could use the new cash to cover future losses. Banks are also worried about lending in a bad economy for fear they won't get their money back.

Despite Secretary Paulson's urging Monday, the bailout bill does not give him the power to force banks to lend the money they receive.

"It doesn't specifically require them to make a certain amount of loans or deploy the capital in a particular, proscribed way," said John Dugan, comptroller of the currency.

Dugan, who oversees national banks, says the government did not seek that power because it doesn't want to micromanage big financial institutions — for both practical and ideological reasons.

Of course, banks can boost lending without actually making new loans themselves. Citigroup, for instance, is interested in buying a weaker bank. Gary Crittenden, the company's chief financial officer, says Citi could use the bailout money to rebuild the reserves of the bank it plans to buy. Then, that bank could make loans to businesses and consumers.

Patriotic Lending

Most analysts think the economy is in recession. And for banks, the lending landscape is precarious. But do banks have a patriotic duty to make more loans?

"It's interesting, because patriotism on the one hand also turns out, over the long haul, to be the right thing for the financial system," Crittenden said. "And every major financial institution, even the smaller ones, benefit if there's more stability."

Dugan thinks banks will lend more money over time. And if they don't, he says citizens will be angry.

"I think the court of public opinion will be watching, and I don't think anybody's going to be happy if the banks simply hoard the money," he said.

And there's another reason for banks not to stuff all those billions inside a mattress: It's bad business. Having cash on hand may make them feel more secure in tough times, but they can only make real profits when they risk it.

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