Despite the flood of cash from the government, Banks are still hoarding cash…What could explain this phenomenon?
From BusinessWeek:
They (Banks Chiefs) argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans. “It’s not a one-to-one relationship,” says BofA CEO Kenneth D. Lewis. “We don’t write $15 billion in loans because we got $15 billion from the government.”
So there’s a disagreement on what the TARP money should be used for…But some may ask why banks won’t make new loans? The answer, as always, is dependent on money:
Right now there’s little financial incentive to make fresh loans. In the current unease, new corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It’s more lucrative, then, for them to buy old loans that are discounted already.
Just when you think all of the side effects of repealing Glass-Steagall were out of the system. Now banks won’t even make new loans; since there are so many discounted securitized mortgages on the market, they’re using the TARP money to buy outstanding mortgages…
Since the TARP was so Ad hoc by nature, The government didn’t force them to do otherwise, so you can’t blame banks for cutting the best deals.
The most important point regards their capital requirements:
Under federal rules, banks are required to maintain a certain level of capital based on their assets. When they incur losses, they either have to raise more capital or sell assets to keep those ratios in check.
