Bank Lending Keeps Dropping

Analysis of Treasury Data Paints Starker Picture Than Official Government Snapshots By DAVID ENRICH, MICHAEL R. CRITTENDEN and MAURICE TAMMAN Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector. According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program. The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions. The Journal's analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline. The Obama administration is scrambling to defuse a backlash surrounding the bank bailout. Political disquiet over banks' perceived lack of lending, as well as their spending on bonuses and perks, has provoked skepticism about the administration's ability to revitalize the banking system. Any evidence that banks are lending less could reinforce criticism of the program, and put pressure on plans crafted by Treasury to unfreeze credit markets and support bank balance sheets. With bailout funds dwindling, one option the Treasury might pursue is to turn loans into common equity. Speaking in Trinidad on Sunday, President Barack Obama said that he'll require "accountability" for the U.S. banks receiving bailout money, and that he would not put taxpayer money into a "black hole." In a news release Wednesday unveiling the February lending numbers, the Treasury touted "the relatively steady overall lending levels." Without the capital injections, lending would have suffered a far-steeper drop, it said. "Within this challenging environment, the February survey shows that banks extended only a slightly smaller total volume of loan originations in February than January." The Treasury analyzed the monthly percentage change in the amount of new loans at each of the top 21 recipients of taxpayer funds. It then calculated the median change in lending at the 21 banks. (The median is the figure that falls directly in the middle of a string of numbers.) By that measure, the Treasury said, lending dropped 2.2% in February compared with the prior month. Using the same raw data, the Journal's analysis focused on the total amount of new loans by the 21 banks, a more comprehensive measure. In February, that total fell 4.7% from January, more than double the government's estimate of the decline in the median. The Treasury hasn't released its own tally of the October to February decline. A Treasury spokesman said that "no one metric can accurately capture lending activity across the nation. That's why we provide the data set in full." He said that "the declining levels of lending obviously reflect current economic conditions. But Treasury firmly believes that lending levels would be much lower" without the government's capital injections. The level of lending is an important factor in determining how fast the economy will turn around. It's also key for the government in deciding whether to allow individual banks to repay federal funds. If the Treasury believes doing so will diminish the economy's lending capacity, it could take a hard line on repayments. Banks defend their lending, saying they're eager to issue new loans, refinance existing ones and modify those in danger of default. Complicating their efforts, bank executives say, is a decline in demand among consumers and businesses. The lending data indicate that consumer loans, especially mortgage refinancings, are accounting for an increasing portion of bank lending. In February, nearly half of lending by the 21 banks was to consumers, up from about one-quarter in October. But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicates. One factor that may have depressed commercial borrowing is a partial thawing of bond markets, where some big companies raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, but still only about half the level of last May, according to Thomson Reuters. The Treasury's monthly snapshot of lending at the top 21 TARP recipients, the only standardized source of data on loan origination, is part of the administration's effort to be more transparent about the myriad bailout programs. According to The Journal's analysis of the Treasury's data, 19 financial institutions made or refinanced a total of $226.3 billion of loans in October. In February that figure had fallen to $174.2 billion. To reach that figure, the Journal made several adjustments to Treasury's data. It excluded American Express Co., which received TARP funds midway between October and February. It also excluded Wells Fargo & Co., which acquired Wachovia Corp. at the end of 2008 and doesn't break out how much of its 2009 lending volumes stem from that purchase. American Express and Wells Fargo were both included in the Journal's separate measurement of lending changes between January and February. PNC Financial Services Group Inc.'s numbers were boosted by its acquisition of National City, but the likely effect on the total is minimal. Some changes in loan volume may reflect seasonal factors. In February, home-equity loans were a bright spot because consumers like to borrow to remodel ahead of warm weather. The number of student loans fell, which is typical during February. Of the 19 banks, the only ones to originate more loans in February than October were BB&T Corp., a regional bank based in Winston-Salem, N.C.; Wall Street giant Morgan Stanley; and State Street Corp., a Boston-based company that provides financial services mainly to institutions and wealthy individuals. One of the banks showing the biggest lending decline was J.P. Morgan Chase & Co. In October, the New York bank made or refinanced $61.2 billion in loans. That figure declined 35% to $39.7 billion in February. J.P. Morgan executives defend their lending levels. In the first quarter, the bank extended about $150 billion in new credit to consumers and businesses, "despite the fact that loan demand has dropped dramatically," a spokesman said. In March, the spokesman said, J.P. Morgan made $65.5 billion in new loans -- slightly more than it made in October. The Treasury's conclusion that lending has dropped only modestly is partly the result of its focus on the median monthly change at the top banks, rather than the change in average or total lending. Thus, for the month of February, the Treasury based its report on the 2.2% drop in loan origination at PNC, which fell at the midpoint of the 21 banks that the Treasury surveyed. Statisticians sometimes use median figures to avoid having data distorted by outliers on either end of the spectrum. Treasury officials have been concerned about the month-to-month volatility in the bank data and are still developing how best to present it. Tom Fullerton, an economics professor at the University of Texas at El Paso, defended the use of the median, citing the monthly volatility in bank-lending data. But other experts say the average would provide a more accurate measure lending. Economist David Boyum says using the median does not answer the fundamental question: "What has happened to overall lending?" Write to David Enrich at david.enrich@wsj.com and Maurice Tamman at maurice.tamman@wsj.com Treasury statement http://www.financialstability.gov/latest/tg_041509.html