I’m assuming there’s a factual answer to this question, so I’m posting in GQ.
The complaint in recent months is that banks “just aren’t lending money.” businesses are having a hard time securing credit, and in fact a friend of mine who is financially comfortable was recently denied a home equity loan; he would have qualified a couple of years ago, but between the loss of property value and more conservative lending rules, he was somehow deemed an unacceptable risk.
So if banks aren’t lending money (as much as they used to), how are they paying bills?
They are lending money, they are just not lending money to people with any risk.
This is most problematic for smaller businesses.
For instance, I had my own business and I used my Visa as “float” line of credit. Of course they credit card companies chopped off the line, though I never missed a payment or defaulted.
Why, because the credit line shows up negatively to them. So they just chop off all the credit lines people didn’t use or used responsibly. Then the people who declare bankruptcy did so, so that wiped that mess off their books.
The result is nothing in reality changed but the books look better. After getting government money the banks first obligation is to show they are responsible not they are making money.
The thing is businesses large and small run on credit. No one keeps that much cash for payroll, future projects, and such on hand. It makes no sense, when that money could be working for you.
But the banks simply stopped lending to anyone with the slightest risk.
Now this doesn’t mean you are a bad risk but rather a potental risk. Supposing you go in for a mortage. Now the bank will not only look at how long you’ve been at a job, but the job itself. If you’ve worked for a job for 10 years and earn a good salary, but the company you work for is shaky, then you’re a potential risk and denied.
This explains the oddities that creep up.
So good credit ratings, with long time jobs and good companies with money in the bank will get loan. Without those four your “a risk” and will be denied.
I work for a bank, and while we’re not lending as much out as we used to, we still have loans out there that we’re making money off of (that 30 year mortgage you took out 5 years ago when the rates were twice as high… yeah, we’re still making money off of you.)
Also, we’re looking at ways to save money. No more free calendars, turning off the computers at night, etc. (One part of that which sucks is that they’re not always hiring when people leave/get promoted/retire, which saves them money, but makes us all work harder.)
Another thing is that goes along with no more freebies is that we’re more strict on fee refunds. It used to be that a customer could get three, four, even five overdraft fees refunded each month. At $35 bucks a pop, that’s a lot of money the bank is losing. Now, we can still do fee refunds, but we’re not going to be giving away the bank with them. A customer who never overdraws, has only one fee and made an honest to Og mistake, we might refund that one fee. Someone who regularly does it, or who has 10 of them, we might only refund a couple. Ultimately, the customer is responsible for managing their finances. If you keep a register and are careful with your purchases and such, you’ll never have an overdraft fee (or service fee or whatever). It’s not our responsibility to teach people how to budget (though we will if a customer wants to sit down with a banker and discuss budgeting). The bank I work for didn’t raise our OD fees, BTW, but we’re just being more strict about them.
You know, if the bank wasn’t making so much money off of people being irresponsible with their money, we might have to lend more money out to make a profit… so stop overdrawing your account and force us to lend money! (Kinda kidding… but who knows, it might work!)
And a WAG - they’re investing. In instruments and derivatives of various types that are giving them a mighty good return, which they then, in turn, use to pay their bills. Notice that there are parts of the economy that are doing quite well. I’m thinking that the stock market is probably up 30%-40% this year. That would indicate that someplace, somehow, someone is making some big profits, including the financial sector. Just sayin’
I know this was probably just an example, but the terms you could get on a loan 5 years ago were probably better than the ones you can get today. I got no closing costs and 5.75% Today you’re looking at 2 - 3K just to refi, and if you pay points you might get below 5.5%
If your bank is offering better terms, send me an IM
Expanding on what Markxxx said, many banks are trying to reduce their risk exposure. They are also parking their money in safer investments, such as U.S. Treasuries. Also, as of October 2008, the Federal Reserve began paying banks interest on their reserves held at the Fed (current rates are 0.25%). Since that time, total reserve levels has increased dramatically, rising from ~$45 Billion in the middle of 2008 to over $1.1 Trillion at present.
Most of these articles about banks not lending show severe ignorance on the part of the writer. Many of the loans they are talking about are small business loans. These are loans that are typically backed by accounts receivable and possibly inventory as collateral. They are usually structure as borrowing base types of loans where the customer provides a monthly certificate stating what their eligible accounts receivable and inventory are. There are then predetermined advance rates that banks lend on this collateral. For example, a bank may lend 80% on accounts receivable that is aged less than 90 days and 50% on inventory.
Now, in a recession, if the small business is selling less units then their accounts receivable will be lower. They will probably also lower their inventory. As a result, the company’s borrowing base per the predetermined formula is lowered and the bank is then providing a smaller loan commitment to the company.
Compound this with the fact that bank regulators are being tougher on banks than in the past and recommending that they hold higher levels of capital and you get lower loans on the books for banks. Blaming banks for loaning less shows a complete lack of understanding about what is going on.
I own a small business. We have a $300,000 line of credit with a well known bank. We have been with them for years, we also have at least $100,000 in the checking account at any time and several of the owners of the company use the same bank for their personal banking needs.
We have never made a late payment on the LOC, never bounced a check, never had any issues at all.
We got a letter form the bank saying that the interest rate on the LOC was going up and that there would be a $500 per annum fee for using the LOC (in addition to any accrued interest).
When we inquired why, it was inferred that the bank has to make money somehow from good decent creditworthy small businesses to offset the losses from the deadbeats.
We then went to other banks to refinance the LOC and none were interested despite the LOC being backed by a personal guarantee from the company owners. They said (unbelievably) that our assets were too high to loan the money to us. We read this as “Hmmm were not going to lend you the money because we don’t really think you need it”.
It’s wacky. We’re closing the LOC and will manage without it until things improve. The bank will also lose 8 checking accounts, at least one which has an average balance in the $100,000 range.
Yeah, but nobody said they were incurring a loss. They are “losing” money that they otherwise would have “made.” OP asked “How are banks making money.”
Personal guarantees aren’t really looked at as high quality credit support from a regulators point of view. They are more interested in collateral that they can put a lien on.
Also, I’d say the better way for you to look at the situation is that either you are looking to banks that have poor capital ratios right now and therefore aren’t able to make new loans. These banks are giving you an excuse as to why they can’t refinance. Or you are looking at larger banks that don’t want to mess with an account your size. There would be plenty of banks out there that would be interested in an account like yours, you just need to know where to look.
They raised the interest rate on my credit card from 9.5% to 14.9% not long ago. That earns them a lot of money if you consider how many credit cards are out there.:mad:
I too had a personal line of credit that the terms have changed on. I dropped it.
I guess money was just too cheap but it’s a shame when you work hard and play by the rules and they still change the deal on you.
Same here with my credit card, never a late payment and they raised my rate from 12% to 25%. Even at 12% I had been meaning to call them for a lower interest rate.
In Canada banks (there are only 12 nationally chartered ones) have been more highly regulated and did not lose major amounts of money during the great meltdown. So I imagine they have not cut off credit to the same amount. I had to look it up because I have never paid any interest but my main credit card has an 18.5% rate.
Have any banks cut off credit cards from people who never owe any interest? It seems to me that they are not making a great deal of money off me.
