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Tuesday, January 26, 2010 5:26 PM


FDIC Friday Lotto: Another Reason Why Banks Are Not Lending


In case you need another reason why banks are not lending, please consider the following email from a Senior Vice President at a small California Bank.

"A California Banker" writes ...

Hello Mish

After our phone conversation last week, I thought of one more important banking tidbit you might want to share with your readers.

If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.

This is a home run for the acquiring bank and far more of an instant benefit than any new lending.
Bankruptcy Lotto

Here's how the process works: On "bank failure Friday", the FDIC matches banks with sufficient capital to failing banks, taking into consideration size, location, and assets.

By spreading out the number of bank failures over many months, the FDIC gives that small percentage of well capitalized banks a further reason not to lend for as long as the weekly lotto continues. Remember, the reason these banks are not in trouble in the first place is because they had prudent lending standards.

In Fictional Reserve Lending I mentioned the two primary reasons banks are not lending:

  • Banks are capital constrained not reserve constrained.
  • Banks aren't lending because there are few credit worthy borrowers worth the risk.

Now we have yet another reason: Why make loans when you might win a hell of a lot more in the Friday lotto by doing nothing?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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