Phew! The US government’s stress tests of the country’s 19 largest banks are finally done and dusted. Sure, 10 of them need to raise $75bn more common equity in total. But both the government and, considering the recent rally, shareholders seem pretty sanguine about it. So that means these banks will boost lending now, right?
Don’t count on it. For starters, banks and borrowers are both still recovering from the financial and psychological scars of the credit crisis. That, along with the recession, which looks set to continue for a few more quarters yet, will keep both supply and demand for new credit muted – aside from some bright spots like, say, prime mortgages, a business that had a bumper first quarter as creditworthy homeowners refinanced in droves.
What’s more, one of the key sources for funding bank lending in recent years, securitisation, remains moribund – financial institutions relied on that market to finance as much as half of all the credit they originated between 2005 and 2007, according to a study by McKinsey on behalf of the American Securitisation Forum last December. Securitisation’s dormant state certainly gives banks the opportunity to win back business once thought lost to the shadow banking system. But they don’t, between them, have enough capital to replace it entirely.
What the stress tests should achieve is to take the risk of a large bank going insolvent off the table – assuming the economy doesn’t turn out worse than the tests’ worst-case scenario. But that simply means there’s less reason for banks to have to crimp lending much further than they already have.
