Minneapolis Fed Has A Thougtful Take On Bank Lending

Wordsmithing is not one of the skills that one normally associates with Fed economists, so their announcement that the country is suffering from “credit vertigo” falls short in the snappy phrase category. Nonetheless, the study by the Minneapolis Fed does describe a credit market that is searching for its sea legs.

The common assumption that the credit crunch is the result of banks being short of cash to lend is not accurate, the researchers found.
Instead, there is a complex mix of lower demand, higher standards and poor credit quality at play in pushing down loan volumes.
“The overall credit environment has changed,” said Ron Wirtz, a staffer at the Minneapolis Fed.
“There might be a bit of credit vertigo as the market searches for the right standard to make credit available to those who seek it and at prices that accurately reflect the risk of the borrower,” Wirtz said.
Credit is available but there are strings attached. But demand for loans has slumped because of concern over the economic outlook.
That strikes me as a much more reasonable and well thought out characterization of the state of the bank lending than what we are used to hearing from Washington. Instead of carping about banks refusing to lend money even after they have been recapitalized the statements from the Minneapolis Fed seem to paint a picture of creditors and borrowers trying to come to grips with some harsh new realities in an uncertain time.
It may take more than a little time for that new relationship to find some solid ground. We are unlikely, I hope, to return to the good old days when we do recover from this malaise. Banks are going to be under severe pressure to enhance profitability in order to grow out of their problems even as they may see profit margins squeezed by government regulation. Additionally, old fashioned credit analysis combined with realistic risk premiums are going to likely be the order of the day. Inevitably that’s going to translate into higher interest rates and shorter leashes on borrowers. Presumably it also translates into sounder banks and healthier borrowers.
I doubt “credit vertigo” is going to join the likes of “quantitative easing” and “TARP” as overused words but the thought behind the words is helpful.

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