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Banks Are Lending, Say Treasury Strategies Partners

In the midst of continuing media coverage surrounding U.S. banks' failure to lend and their use of federal bailout money, Anthony J. Carfang and Cathryn R. Gregg of Chicago-based ""Treasury Strategies, Inc."":http://www.treasurystrategies.com argue that financial institutions +are+ lending.
Treasury Strategies is a consulting firm providing corporate and financial institutions with expertise in the areas of treasury management, working capital management, liquidity, and related financial functions. The firm's client list includes such names as Bank of America, Barclays, Charles Schwabb & Co., the city of Chicago, the Federal Deposit Insurance Corp. (FDIC), Fiserv, the U.S. Department of Justice, and the U.S. Treasury Department. Carfang and Gregg, partners at Treasury Strategies, said they felt compelled to set the record straight on the current lending environment and sent an open letter to Congress outlining the firm's analysis of banks' recent lending activities.
Carfang and Gregg said that despite outcries from the legislative chambers that ""bank lending is frozen,"" and that tighter regulation and supervision is needed to ""force banks to begin lending,"" the notion that banks are not lending is false. According to the two partners, the ""Federal Reserve's"":http://www.federalreserve.gov own data show that lending is robust and growing.
In their letter to Congress, Carfang and Gregg point out that the Fed's statistics show solid loan growth across key economic sectors. Lending by domestic commercial banks, now at nearly $7.2 trillion, grew 5.3 percent during 2008, and increased at a 5.5 percent annualized rate in the fourth quarter, according to Federal Reserve data.
Commercial loans grew by 2.4 percent during the fourth quarter. Consumer loans and real estate loans grew by 3.4 percent and 3.0 percent, respectively, during the quarter. The only category to decline, Treasury Strategies said, was inter-bank loans/repurchase agreements, which accounts for less than 5 percent of all lending. Despite numerous anecdotes of borrowers facing difficulty, this evidence clearly shows banks are lending to businesses and consumers, the firm's partners said.
According to Carfang and Gregg, one key measure of lending activity is the loan-to-deposit ratio. A higher ratio indicates aggressive lending; a lower ratio indicates tight money. At the height of the dot-com bubble, this ratio reached 105 percent. In 2004, it hit a low of 93.8 percent. Today, it stands at 98.6 percent, near the midpoint of its ten-year range. Typically, during an economic downturn, lending decreases, terms become more restrictive, and cyclical business and consumers with inadequate credit capacity have difficulty borrowing at all. The good news is that during this current cycle, aggregate lending is not decreasing, Treasury Strategies said.
Recently, several Internet and major news outlets have printed stories about bank lending dropping by 1.4 percent in the fourth quarter. This is a technically correct statistic for the ten banks in the study. However, Treasury Strategies points out that the third quarter numbers of these banks were inflated by a record $194 billion spike in lending activity that occurred during the final days of September following the collapse of Lehman and AIG. Adjusting for that aberration, the 1.4 percent drop actually becomes a 1.3 percent gain, Treasury Strategies explained.
With loan growth and loan deposit ratios hovering near historical norms, indications are that current lending levels are prudent, Treasury Strategies said, and additional regulation or legislation around bank lending could be misguided and disruptive at best. The firm notes that at worst, tightened regulation would distort the markets and could possibly lead to a round of imprudent lending, prolonging the downturn. And according to Treasury Strategies, with loan demand declining as a result of consumer de-leveraging, there is a serious risk that mandated lending would result in bad loans being made to unqualified borrowers - the culprit of the nation's recent subprime tsunami.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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