Game of Risk

Shrinking Bank Loans Stall Economy

No one wants to take a risk in a tough economy. The Wall Street Journal looked at loans from 15 large U.S. banks that collectively hold 47 percent of federally insured deposits—and that received $182.5 billion in bailout money from TARP—and found that the total amount of loans shrank by 2.8 percent in the second quarter. More discouragingly, more than half of the loans issued in April and May were refinanced mortgages and renewed credit to businesses, not new loans. In other words, banks aren't issuing new loans because they're trying to save money to protect themselves against rising loan losses, and companies and consumers are trimming spending in order to get through the recession. The two trends combined make it difficult for the U.S. economy to rebound; analysts predict loan portfolios won't start earning until the second half of 2010.