This is especially true if you’re a bank.
First they’re accused of singlehandedly bringing down the economy because they were reckless. Then they were criticized for paying their top execs too much after being bailed out by the U.S. taxpayers.
Bank execs are becoming apoplectic. No wonder lobbying expenditures by the nation’s biggest banks climbed more than 12 percent last year. Someone has to get out the message for this battered group.
Now banks are catching flack for being too stingy with their loans.
Despite historic profits during the final two quarters of last year, banks are sitting on a pile of cash estimated to be nearly $1.3 trillion. This equates to a record 98 cents for every dollar outstanding in existing business loans.
Retreat by Corporate Borrowers
According to figures recently compiled by the Federal Reserve, the ratio of cash to corporate loans has more than quadrupled from 21 cents in June 2008. Fed filings show that corporate loans shrank 14 percent, to $1.32 trillion, during that period as bankers started tightening standards to curb record defaults and meet anticipated demands by regulators for more liquidity.
At a time when unemployment is still hovering near 10 percent, and with the President pushing for greater access to lending for the country’s small businesses, banks are leaving more cash idle. Although bank earnings have been generally up across-the-board, this trend may put a significant crimp in future profits. Some analysts are projecting a drop in returns to about 33 percent from pre-crisis levels.
The cash piling up at some of the largest banks, like Citigroup and Bank of America, has created a policy conundrum for President Obama.
Following the bailout, the federal government became the single largest stakeholder in both of these mega-banks. Presently, the U.S. Treasury holds 27 percent of the outstanding stock in Citigroup. As of December 2009, the U.S. government has reaped about $2.5 billion in dividends on the $45 billion the taxpayers fronted to Bank of America.
On the one hand, the President is pressing these banks to lend. But at the same time, he has to balance this policy objective without compromising the ability of the banks to repay TARP or jeopardizing future dividends to the government.
As of Dec. 31, Citigroup’s $193 billion in cash and deposits with other banks stood at $1.15 for each dollar of existing corporate loans, which totaled $167 billion. That’s double the ratio in June 2008, when cash totaled $113 billion against $222 billion of corporate loans at Citigroup.
Explaining the Surplus
At Bank of America Corp., the biggest U.S. lender, cash and deposits at other banks tripled to $146 billion, or 64 cents for each dollar of commercial loans at the Charlotte, NC-based bank.
Analysts at banks like JP Morgan Chase & Co. attribute the cash surplus to slack demand in borrowing by businesses. The bank contends that its customers are simply using less of their available bank credit lines than in the past.
Internal data released by JP Morgan Chase shows that commercial and industrial loans at the bank totaled $75 billion compared with $81 billion of cash and deposits with banks at the end of September. Its cash was 63 percent higher and its loan portfolio was 54 percent lower than in June 2008.
During a December White House meeting, the President prodded banks to step up their lending to businesses to fuel the recovery. On Feb. 2, Mr. Obama announced an initiative to direct $30 billion in remaining TARP funds through community banks to small businesses. It is likely that the major banks will be the gateway through which these funds are directed.
At the same time, several Congressional committees, including the Senate Banking panel chaired by outgoing Connecticut Democrat Christopher Dodd, are delving into the role of lax lending standards in creating the financial crisis. With this heightened scrutiny, it’s not surprising that the banks feel as if they are caught on the horns of a fiscal dilemma.
The President’s policy objectives are laudable. No one disagrees that resurgence in bank lending is essential to maintaining the slow gains made so far in the economic recovery. But most banks will remain gun-shy until they have greater certainty as to the future liquidity standards regulators plan to impose.
In the end, if the President wants to achieve this policy initiative relative to small enterprises or business lending in general, then he must direct his team to work more closely with Congress, the regulators and the banks to fast-track their regulatory overhaul of the financial industry. Until these regulations are finalized, there is not much the President or anyone else can do to prevent the banks from hoarding their cash.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
