The nation's major banks modestly reduced their overall lending in recent months, even while they were collecting nearly $200 billion in federal bailout funds, the Treasury Department said Tuesday in its first progress report on the banking rescue program.
The survey of 20 major banks left unresolved the question of how well the government banking bailout program is working, though economists and finance experts were generally reassured that lending had held up relatively well in the face of a drastic economic downturn and a near meltdown in the banking industry.
"It is roughly neutral, and that in itself is encouraging," said James VanHorne, a Stanford University finance expert. "I was concerned about a meltdown."
In October, Treasury began implementing the $700-billion Troubled Asset Relief Program, buying preferred stock and rights to purchase common stock from hundreds of banks across the nation.
The rushed program was meant to avert a wholesale collapse of the industry by pumping cash into the system with the hope that it would lead to more lending to companies and individuals. So far, about $200 billion has been paid out to banks, with commitments for about $50 billion more.
The lack of transparency in how Treasury handed out the money and the lack of restriction on how banks could use it has fueled suspicion that the program would end up costing the government billions in securities losses.
By one estimate, Treasury paid $70 billion more for the bank securities than their underlying value. But without the program, most experts say, not only would lending have dropped, but the entire banking system would have collapsed.
Even now, the threats to the system remain potent, with an estimated $1 trillion to $2 trillion in bad assets still to be written off.
"Are we out of the woods? I don't think so," VanHorne said.
In their report, Treasury officials said total mortgage and corporate loans were down by 1% each, while credit card balances were up 2%. New commitments for commercial real estate loans dropped 19%. Though the report did not include an average number for all lending, it described the industry as in a "general trend of modestly declining total loan balances."
Putting the best spin on conditions, it said, "Despite significant headwinds posed by unprecedented financial market crisis and economic turn, banks continued to originate, refinance and renew loans."
