Banks increase lending for range of customers

Automakers' sales nose-dive

By Patrice Hill (Contact) | Tuesday, November 4, 2008

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Attention members of Congress: U.S. banks are not hoarding their cash but have substantially increased lending in the past month to businesses, homeowners, the federal government and even the struggling auto sector.

Bank financing for all manner of borrowers jumped nearly $500 billion to $10.06 trillion in the week ending Oct. 22 from September lending levels, the Federal Reserve reported Friday. That amounts to nearly twice the $250 billion of cash infusions that the Treasury is planning to spur lending among banks.

Banks are even helping the shell-shocked auto sector at a time when it is suffering its worst sales in decades. General Motors Corp. reported a stunning 45 percent plunge in October sales - its worst since World War II - as a result of a major pullback in consumer spending combined with a credit crunch that has starved both the automaker and its customers of loans. Automakers overall reported a one-third drop in sales to the lowest levels since 1991.

As dire as GM's plight has become, it would have been worse if it hadn't been able to tap a $4.5 billion line of credit with Citigroup and JP Morgan - two major recipients of Treasury cash - after getting shut out of corporate borrowing markets.

The sizable shift to bank financing by big businesses such as GM and Marriott International that have had trouble accessing collapsed credit markets was evident in the Fed's survey. In just the first three weeks of October, bank loans to businesses increased by $65 billion and banks purchased $132 billion in corporate debt obligations to finance business operations and expansion plans.

Banks in the same three weeks also financed an $87 billion jump in mortgage loans, a $38 billion rise in home equity loans, and an $18 billion uptick in credit card and other consumer loans. They also purchased $127 billion of bonds issued by the Treasury, Fannie Mae and Freddie Mac to help finance home mortgages and the government's massive rescue programs for banks and other financial firms.

It has become fashionable in Washington to complain that banks are not using their Treasury cash infusions to lend to consumers and business customers as Congress wished. The Fed's figures show, however, that banks have remained active in providing much-needed credit to the economy even as other markets for loans such as the corporate bond, municipal bond and commercial paper markets have all but collapsed.

The banks are getting little thanks or credit on Capitol Hill for playing this vital role, however.

Legislators from House Minority Leader John A. Boehner, Ohio Republican, to House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, have expressed outrage that banks may be using the taxpayer-provided funds to pay dividends to shareholders and bonuses to executives and to acquire other banks, often in deals arranged by federal regulators to prevent taxpayers from having to bear the burden to close failed banks.

"The capital infusion for big banks was for the purpose of getting some lending moving in the economy again," not to pay for executive bonuses or acquisitions, said Democratic Policy Committee Chairman Byron L. Dorgan, North Dakota Democrat, who vowed to force reforms on banks.

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