July 10, 2010 – I need to correct an article I wrote last month stating that banks are lending again. Total bank loans have indeed grown as I reported, but not because banks made new loans. Instead, the increase was a result of pure accounting.
On April 1, 2010, the accounting rules for banks changed. Credit previously extended in the form of derivatives booked off bank balance sheets now has to be accounted for on a bank’s balance sheet. Thus, in accordance with rule FAS 166/67, banks brought about $300 billion of assets and liabilities onto their balance sheets in April. This was credit already extended.
So contrary to the conclusion in my previous article, bankers are still sitting on their hands. They are not making new loans, when taking into consideration the bookkeeping change explained above. Bankers are still trying to repair their over-leveraged balance sheets, as we can see in the following chart.
Note too that bank purchases of US government paper continue to taper off. I noted earlier this year I noted how banks were using their depositors’ money to buy US government paper. The pace of those purchases is slowing down.