To prevent a financial implosion, the federal government provided millions of dollars in bailout money to some of the largest banks in the country several years ago. In exchange for this funding, the banks were expected to increase their lending practices.
The goal was to ease the credit restrictiveness that could worsen the economic slowdown.
The government instructed banks to apply the money toward loans to individuals and banks. This has not happened. The Federal Deposit Insurance Corp. reported another decline in bank lending during first quarter 2011. Outstanding loan volume has declined in 10 of the 11 quarters since June 2008.
Though it grew during first quarter 2010, this was due only to an accounting change.
An analysis conducted by MSNBC.com and the American University Investigative Reporting Workshop determined that total lending by U.S. banks has declined almost nine percent since March 2008. Lending had already decreased by the time the billions of dollars under the Troubled Asset Relief Program were being distributed.
Weak demand and an attempt to stop losses due to the housing market collapse were two main causes.
During a recession, lending tends to soften and then rebound relatively quickly. This time, that has not occurred. According to the FDIC, the decrease in lending last quarter represented the fifth-largest in the 28-year tracking history of the quarterly figures.
In the past three years, home loans declined by 13.5 percent and business loans fell 18.5 percent.
Some people blame the banks but this does not make sense to financial analysts. These experts note that banks make a living by lending. On the other hand, regulators are advising banks to build their capital cushion. These two practices do not go hand in hand.
Continued restricted lending and a large number of failing banks have steered consumers to expensive alternatives like payday loans.
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