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Informing the public about the Federal Reserve

Banks seem to have a lot of money, so why aren't they making more loans?

Total loans held by commercial banks began to expand modestly in the second half of 2011. However, it seems that both demand and supply factors continue to help explain why bank lending has not recovered from the persistent declines over the previous few years. In particular, businesses and households aren't applying for many new loans, and banks' lending standards and conditions mostly remain stricter than they were prior to the crisis; both of these factors have depressed the level of bank lending.

Business loans grew robustly in 2011 and continued to expand through the first half of 2012 even though many businesses have retained large cash reserves that they can use to finance their investments rather than borrow from banks right now. In addition, some large, high-quality firms have been issuing long-term corporate bonds, which generate funds they can use to pay down their bank debt. Further, in recent surveys by the National Federation of Independent Business (NFIB), relatively large fractions of small businesses continue to report that their most important business problem is that their customers aren't buying as much as in the past, and that this lack of demand is likely a factor that has held back their own need for new funds. However, recently, this fraction has been declining and small business owners appear to have become a bit more optimistic about their outlook for sales.

Growth of bank loans to households has remained subdued. Some consumers, perhaps in particular those who already have a large amount of debt, may be trying to pay down the loans they already have and are wary of taking on more debt at this time.

Another factor is that many banks apparently concluded that their underwriting standards had become too loose in the years prior to the financial crisis, and have tightened their lending terms and conditions quite a bit since then. Terms and conditions on loans offered to households with high credit scores and on loans secured by automobiles appear to have eased somewhat over the past year. However, weakened financial conditions, reduced income, falling values for real estate that could be used as collateral, and, in some cases, a recent history of payment problems continue to make it more difficult for some businesses and consumers to qualify for loans, especially under current stricter standards.

Some bankers and borrowers believe that enhanced supervision and regulation has made it more difficult for banks to expand their lending. The Federal Reserve takes seriously its responsibility to ensure that supervisory actions to protect banks' safety and soundness do not unintentionally constrain lending to creditworthy borrowers, and we have taken a variety of steps to address these concerns. For example, we have issued guidance to supervisors stressing the importance of taking a balanced approach to supervision and emphasized to examiners that an open dialogue with bank management is essential.

Related Information


Chairman Ben S. Bernanke

May 10, 2012

Last update: August 2, 2013