Two years after the credit crisis began, bank lending remains sluggish, threatening economic recovery.
Loans held by 15 large U.S. banks dipped 2.8 percent in the second quarter, and more than 50 percent of loans issued in April and May constituted mortgage refinancings and business credit renewals, not new loans, according to a Wall Street Journal study.
The slow loan generation stems from factors affecting lenders and borrowers.
Lenders are concerned about preserving capital amid mounting loan losses. And demand for loans is sliding from both companies and individuals as they batten down their spending hatches for the recession.
"You've got to have fewer people paying down loans, ... and you've got to get banks to loosen underwriting standards," RBC Capital Markets analyst Gerard Cassidy told The Journal.
"That is when you will see loan balances in the U.S. banking system expand from where they are today. When that happens, you will see the economy really start to blossom."
Bank of America, the country’s largest by assets, announced that its loan portfolio dipped 3.6 percent in the second quarter. The decrease stems from bigger loan losses and lagging loan demand, as borrowers focus on paying off prior debts, a bank spokesman said.
While the U.S. tries to encourage bank lending, China’s government is trying to rein in its banks’ surging loan portfolios.
“China's economic recovery is being constructed on the back of a savaged banking system,” Derek Scissors of the Heritage Foundation told the Financial Times.
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