Are TARP Funds Responsible for the Credit Crunch in Consumer Lending?
You might think TARP funds were necessary to get the consumer credit market moving. After all, reports abounded that consumer credit was “frozen.” However, the facts do not paint this picture. According to the records of the Federal Reserve, total credit was expanding by 2.9% on an annualized basis, which is close to the long-run growth trend of the economy, from November 2007 to August 2008.
Bailout money went predominantly to large commercial banks and finance companies (defined by the Federal Reserve as the credit arms of the big 3 automakers). Credit unions did not receive any TARP funds and small commercial banks received only a limited amount.
Lending at finance companies is closely correlated with the demand for cars and the auto industry has suffered a serious pullback. However, lending at large commercial banks should have grown at a faster rate than pre-TARP if TARP funds broke a credit logjam, while lending at small commercial banks and credit unions should lag behind the big banks. This is not borne out by the facts. The rate of growth of consumer credit since January has declined most dramatically at the large commercial banks:
For Large Commercial Banks, they expended their lending by 10.4% from November 2007 - September 2008 and by 13.3% from September 2008 to January 2009. However, their lending declined by 7.6% from January 2009 to the present.
For Small Commercial Banks, they expanded their lending by 2.2% from November 2007 to September 2008 and by 12.2% from September 2008 to January 2009. They also expanded their lending by 9.8% from January 2009 to the present.
For Credit Unions, their lending declined by 0.6% from November 2007 to September 2008 and increased by 2.6% from September 2008 to January 2009. Their lending was off 0.8% from January 2009 to the present.
In other words, the large commercial banks had the greatest decline in lending post-TARP.
From September 2008 to January 2009, although large commercial banks had TARP money, there was little in the way of regulations on them. TARP money began to come in the form of excess reserves which ballooned from less than $2 billion in August 2008 to more than $767 billion in December 2008. Large commercial banks were actually content to allow consumers to expand their use of their credit lines, perhaps believing that the TARP funds acted as a form of insurance against default. Still, lending was up at all three groups and the large banks do not appear to be increasing their lending significantly faster than they had previously been doing.
Things change by January. Already rumblings were being made in the media that the banking sector was not lending the TARP funds and that restrictions needed to be placed on them to force them to lend. There was a lot of worry that the funds had been given without any strings attached, so the government began to implement ex post ad hoc regulations to ensure that lending would be expanded. In addition, the TARP funds often came in the form of warrants that pay between 5% and 8% per annum. These costs are sigificantly higher than the rates that banks can receive from mortgages and personal loans. It just doesn't make sense to borrow expensive money to lend cheaply. Furthermore, at least for the consumer sector, the figures show that the banks and credit unions were lending and, in fact, were expanding lending in a major way for the last four months of the year.
It is only when these institutions start being told that they need to account for the money that we see the consumer credit market freeze. Notice that the large commercial banks that initially expanded lending after the TARP funds first became available see large reversals at the start of this year. Excess reserves continued to climb reaching $798 billion in January 2009 and hit a high of $844 billion in May 2009. This is signficantly higher than the total amount available to banks under TARP, indicating that banks were not only not lending out TARP funds, they were not lending out other funds that they had at their disposal. Consumer credit dropped by 7.6% at the large commercial institutions over the first five months of the year.
Once they saw the strings that were attached to them, it should not be surprising that large banks have scrambled to try to pay back the funds. Credit unions and small banks, which form the bulk of sustained lending, did not see large injections of TARP funds. This should help satisfy the case that the TARP funds, once the full restrictions came into force, did not do what they were intended to do: increase consumer credit lending in any significant way. Indeed, if any assets of large commercial banks are toxic, TARP funds are.
