TARP and Lending

I have noted before that even if one sets aside issues relating to fairness and cost to the Irish taxpayer, I don’t believe that NAMA will achieve what the government states is its purpose, namely “getting credit flowing again.”

In this context, it is interesting to see that there is a debate this week in the US, prompted by this government report, which focuses on, among other things, whether TARP increased lending at assisted institutions. Chicago’s Casey Mulligan writes about it here.

The report’s conclusions, on page 30, noted that there were US government officials who had concerns about the health of some of the banks being assisted and that statements that TARP was going to get lending going again created “unrealistic expectations.”

James Kwak of Baseline Scenario responds here that the politicians knew full well that TARP probably wouldn’t increase lending—that it was more an emergency measure to keep the banking system afloat—and that these claims were made simply to obtain the necessary political support for an unpopular measure. Sound familiar?

9 replies on “TARP and Lending”

Nama proves that the banks are dab hands at managing our politicans. They will declare their willingness nay eagerness to lend. They will trumpet special new small business, farming, environmental funds that they are creating. They will launch an advertising blitz about business lending. They will continue to gently dissuade as many customers looking for loans as they can to massage their statistics. And they will have to give some money to developers to finish projects, that will count. For everyone else they will lend as little as they can get away with. They will have no problem stalling the politicians until they would have wanted to lend themselves anyway.

I don’t know whether or not NAMA is going to work any more than anyone does – it is all speculative and we shall perhaps know in 15 or 20 years’ time if even then. People might look up ‘Icarom’, including its inclusion in the most recent annual report and accounts of our illustrious Central Bank for 2008, at p52 (31 Dec 2008 Balance Sheet) and also the related Note 20 at p62 of the accounts to see possibly how long things last (and how money keeps coming in – to the Central Bank from commercial banks in certain circumstances). Maybe the Bank has found a new Icarom?

Apart from that and this it might be worth everyone going crazy by looking up the following liks which illustrate how the EU authorities are dealing with the Community banking crisis. Happy days!

29.06.2009 State aid: Overview of national measures adopted as a response to the financial/economic crisis
12.05.2009 State aid: Commission approves recapitalisation of Allied Irish Bank
12.05.2009 State aid: Commission approves aid package for German bank WestLB
12.05.2009 State aid: Commission approves additional aid measures from Belgium and Luxemburg for Fortis
07.05.2009 Commission authorises Czech temporary scheme to grant compatible aid of up to €500 000
07.05.2009 State aid: Commission extends in-depth investigation into UK aid package for Northern Rock
07.05.2009 State aid: Commission opens in-depth investigation into aid package for German bank Hypo Real Estate
07.05.2009 State aid: Commission approves recapitalisation of Commerzbank
28.04.2009 State aid: Commission approves amendments to Swedish bank guarantee
27.04.2009 State aid: Commission authorises temporary Hungarian scheme for subsidised state guarantees to boost real economy
15.04.2009 State aid: Commission approves prolongation of UK financial support measures to banking sector
08.04.2009 State aid: Commission opens in-depth investigation into alleged aids to Fortis Bank Nederland and Dutch activities of ABN Amro
26.03.2009 State aid: Commission approves recapitalisation of Bank of Ireland
26.03.2009 State aid: Commission approves temporary modification of Austrian risk-capital scheme to boost real economy
24.03.2009 State aid: Commission authorises UK scheme to support lending to businesses
24.03.2009 State aid: Commission authorises amendment to French scheme to inject capital into certain credit institutions
23.03.2009 State aid: Commission authorises Austrian temporary aid scheme to grant compatible aid of up to €500 000
20.03.2009 State aid: Commission approves Slovenian liquidity scheme for financial sector
20.03.2009 State aid: Commission authorises temporary Belgian scheme allowing subsidised state guarantees to boost real economy
20.03.2009 State aid: Commission authorises Latvian temporary aid scheme to grant aid of up to €500 000
17.03.2009 State aid: Overview of national measures adopted as a response to the financial and economic crisis
17.03.2009 State aid: Commission approves modification of French risk capital scheme to boost real economy
13.03.2009 State aid: Commission approves Portuguese state guarantee for €450 million loan to Banco Privado Português
13.03.2009 State aid: Commission opens in-depth investigation into restructuring of Dexia; authorises certain urgent measures
20.02.2009 State aid: Commission authorises amendment of Italian scheme to inject capital in credit institutions
19.02.2009 State aid: Commission authorises temporary German scheme allowing reduced interest rates to boost economy
17.02.2009 State aid: Commission raises no objections to the change of ownership of Anglo Irish Bank
16.02.2009 State aid: Overview of national measures adopted as a response to the financial and economic crisis
13.02.2009 State aid: Commission approves German real economy crisis measure
12.02.2009 State aid: Commission approves €1.5 billion capital injection from the Belgian public authorities for Ethias group
12.02.2009 State aid: Commission authorises support package for Hungarian financial institutions
11.02.2009 State aid: Commission approves Swedish scheme to recapitalise banks
11.02.2009 State aid: Commission finds aid to BT partially unlawful and orders recovery
03.02.2009 State aid: Commission approves support package for Danish financial institutions
29.01.2009 State aid: Commission approves modifications to Swedish support schemes for financial institutions
28.01.2009 State aid: Commission authorises modification of French scheme to inject capital into certain credit institutions
22.01.2009 State aid: Commission approves € 6.7 billion guarantee for SdB – Sicherungseinrichtungs¬gesellschaft deutscher Banken mbH
21.01.2009 State aid: Commission approves Finnish state guarantee for Kaupthing Bank
14.01.2009 State aid: Commission approves recapitalisation of Anglo Irish Bank
30.12.2008 State aid: Commission approves first real economy crisis measures
23.12.2008 State aid: Commission approves Italian recapitalisation scheme for financial institutions
23.12.2008 State aid: Commission approves Spanish guarantee scheme for credit institutions
23.12.2008 State aid: Commission approves modifications to UK financial support measures to the banking industry
23.12.2008 State aid: Commission approves German banking rescue aid for NordLB
23.12.2008 State aid: Commission approves German banking rescue aid for NordLB
23.12.2008 State aid: Commission approves state support for IKB
23.12.2008 State aid: Commission approves Latvian support scheme for banks
18.12.2008 State aid: Commission approves recapitalisation of Belgian KBC Group
16.12.2008 State aid: Commission approves Swedish rescue aid for Carnegie Bank
12.12.2008 State aid: Commission approves modifications to German financial rescue scheme
12.12.2008 State aid: Commission approves Slovenian support scheme for credit institutions
11.12.2008 State aid: Commission approves Dutch authorities’ recapitalisation of SNS REAAL
10.12.2008 State aid: Commission approves Austrian support scheme for financial institutions
08.12.2008 The role of state aid in tackling the financial & economic crisis – Introductory remarks at press conference
08.12.2008 State aid: Commission authorises French scheme to inject capital into certain banks
05.12.2008 EU state aid rules – part of the solution – EStALI conference
04.12.2008 State aid: Overview of national rescue measures and guarantee schemes
03.12.2008 State aid: Commission clears state aid to rescue and restructure Fortis Bank and Fortis Bank Luxemburg
02.12.2008 State aid: Commissioner Kroes briefs Economics and Finance Ministers on financial crisis measures
28.11.2008 Temporary framework for State aid measures to support access to finance in the current financial and economic crisis
25.11.2008 State aid: Commission approves Latvian state support for JSC Parex Banka
21.11.2008 Mergers: Commission closely monitoring Dutch State plans as regards Fortis Bank Nederland and ABN AMRO Bank Nederland
20.11.2008 State aid: Commission approves Belgian state guarantee for Fortis Bank
20.11.2008 State aid: Commission approves joint aid from Belgium, France and Luxembourg to rescue Dexia
19.11.2008 State aid: Commission authorises support package for Greek credit institutions
18.11.2008 State aid: Overview of national rescue measures and guarantee schemes
18.11.2008 EU competition rules – part of the solution for Europe’s economy – European Competition Day
14.11.2008 State aid: Commission authorises Italian scheme for refinancing credit institutions
14.11.2008 State aid: Commission approves Finnish support scheme for financial institutions
13.11.2008 State aid: Commission approves Dutch emergency recapitalisation of ING
05.11.2008 State aid: Overview of national rescue measures and deposit guarantee schemes
05.11.2008 State aid: Commission approves Danish liquidation aid for Roskilde Bank
04.11.2008 State aid: Commission approves Spanish fund for acquisition of financial assets from financial institutions
31.10.2008 Aide d’État: la Commission autorise le régime français de refinancement des établissements de crédit
31.10.2008 State aid: Commission approves Dutch guarantee scheme for financial institutions
30.10.2008 State aid: Commission approves Portuguese support scheme for financial institutions
30.10.2008 State aid: Commission approves Swedish support schemes for financial institutions
28.10.2008 Preserving the competitiveness of European industry – the contribution of state aid policy
28.10.2008 State aid: Commission approves German support scheme for financial institutions
21.10.2008 Publication of decision approving the liquidity support scheme for banks in Denmark
14.10.2008 State aid: Overview of national rescue measures and deposit guarantee schemes
13.10.2008 State aid: Commission approves revised Irish support scheme for financial institutions
13.10.2008 State aid: Commission approves UK support scheme for financial institutions
13.10.2008 State aid: Commission welcomes revised Irish guarantee scheme
10.10.2008 State aid: Commission approves Danish state support scheme for banks
10.10.2008 State aid: Overview of national rescue measures and deposit guarantee schemes
07.10.2008 State aid: Commissioner Kroes announces guidance for bank recapitalisation and guarantee schemes
07.10.2008 State aid: Commissioner Kroes meets Ireland’s Finance Minister Brian Lenihan to discuss bank guarantees
06.10.2008 Speech: Dealing with the current financial crisis
06.10.2008 State aid: Commissioner Kroes meets Ireland’s Finance Minister Brian Lenihan to discuss bank guarantees
02.10.2008 State aid: Commission approves German rescue aid package for Hypo Real Estate Holding AG
01.10.2008 Speech: Paraffin wax cartel and bank rescues
01.10.2008 State aid: Commission approves UK rescue aid package for Bradford ” Bingley

Feargus O Raghallaigh
There are many of us who do know what is going to happen. You have noticed that ECB has a desire to support banks. Do you know what a bubble is? Eventually all bubbles burst because we run out of capital and fools to spend it inflating the bubble. Banks have been encouraged to lend to bad risks and lo they fail. Now no one wnats to borrow as they will have to repay at a time when business for 90% of them, will be worse than it is now. This is a spiral. It is asset deflationary. Banks’ securities are shrinking month by month triggering more defaults and more loss.
The point about dealing in OPM, other peoples money, is that governments and banks should not specuulate at all. They should be certain.
Government that speculates. I think that you may have captured an element of the executive there!

The thing that brought the crisis to a head last year was liquidity or rather the lack of it when the inter-bank markets dried up because of the crisis of confidence. Therefore banks in addition to rectifying their capital positions will also do almost anything not to have the same reliance on the interbank markets as existed in September 2008.

This relates straight back to the loans to deposit ratios. On the deposit side I presume the marginal propensity to save has gone up but also with unemployment and reduced income there will be a counter-balance with savings being reduced? Maybe some economists on here have a view on which factor prevails?

On the loan side all banks are “de-leveraging” ie reducing lending. This is assisted by a reduced demand for credit as well as reduced asset prices. For instance, AIB’s official policy on interest only periods for home loans has been reduced to 2 years from its previous 5 years. This is official policy but is obviously not advertised before the Late Late on Fridays.

Bottom line is it doesn’t matter if banks have a 20% core tier 1 ratio, if the loan to deposit ratio is not close to 1, they have a massive disincentive to lend.

Interesting view from one of the leading commentators on US banks-
Oct. 2 (Bloomberg) — The U.S. recovery will falter as banks continue to curb lending to small companies, said Meredith Whitney, whose 2007 prediction that Citigroup Inc. would cut its dividend triggered a plunge in the bank’s stock.

“Access to credit is being denied at an accelerating pace,” Whitney said in a commentary in the Wall Street Journal. While large companies have no problem obtaining loans, small businesses “have never had a harder time,” she said in the article, dated yesterday.

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