Where Has All The TARP Money Gone?
This is a question that regulators have been asking regularly for the past several months, and with the results of the stress tests slowly beginning to emerge, we’re starting to get an idea of where all that cash is going. The money was injected into banks to kickstart lending again, helping banks to keep business flowing and giving consumers access to credit in an environment where no banks felt comfortable lending. Unfortunately, a lot of the cash is still sitting on balance sheets with major banks.
As banks have reported their results for the first quarter, many of them beating expectations, we’ve gotten a glimpse into how their balance sheets have changed. One of the biggest changes on most balance sheets is a dramatic increase in cash on hand and ultra short term, liquid investments.
The CFO of Goldman Sachs called this economy a “dangerous environment,” and said, “There is nothing more important than liquidity in this dangerous environment.” His bank increased their cash position from $111 billion all the way to $164 billion during the first quarter alone, an increase of $53 billion. His bank is not alone.
At the end of 2008, Bank Of America reported cash reserves of $33 billion. After the first quarter, that number jumped to $173 billion, an increase of $140 billion! Although it’s impossible to account for where all of that cash came from, it’s safe to say that a good portion of it is taxpayer money that the bank has stuffed into a safe rather than extending credit to customers.
Why are banks holding so much cash? There are several reasons. First, other big name banks, including Lehman Brothers, Bear Stearns, and Washington Mutual have collapsed when their capital dried up and they weren’t able to borrow from other financial institutions. Holding cash provides a buffer is capital is depleted with bad credit loan write-offs and customer withdrawals. Second, banks are under a microscope, and are being as careful as possible to appear financially stable to stay out of the targets of regulators.
Finally, banks have changed their lending standards, and are finding fewer quality borrowers looking for financing. The CEO of SunTrust, which had a 14% increase in liquidity for the quarter, attributed rising cash levels to the fact that “demand remains weak for loans to higher quality borrowers.”
The good news for banks is that most are sitting on mountains of cash that simply weren’t there just a few short months ago. The bad news is that they still have no way to predict how much of this cash will be needed to cover bad loans on their books. And until they can make that determination, credit conditions are likely to remain tight.
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Tags: Balance Sheets, banks, cash, credit, Stress Test
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