In a January 13th, 2009 speech in London, Federal Reserve Chairman Ben Bernanke had this to say:
“A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.”
I have been saying that at the community bank level, the liquidity challenge is partially caused by deposit levels dropping as troubled business borrowers work through their cash balances. And business borrowers whose loans looked great when made may be weakening, even to the point that they are missing covenants.
A banker in the ‘workout’ team at her bank told me last week in a tax return analysis workshop that the lenders are stalled at her company. She is putting them to work helping her team, which has more work than they can handle!
If a business loan is downgraded, and deposits are lower, loan loss reserves must be increased and availability of funds to lend is impacted.
Is that the way you see it? What is your sound bite when someone you know complains the banks are not lending?