Despite Federal Aid, Many Banks Fail to Revive Lending

Jim Chittock waits on EagleBank customers. Deposits at the Bethesda bank shrank in the past three months, making it hard for the firm to increase lending.
Jim Chittock waits on EagleBank customers. Deposits at the Bethesda bank shrank in the past three months, making it hard for the firm to increase lending. (Ricky Carioti - The Washington Post)
By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, February 3, 2009

The federal government has invested almost $200 billion in U.S. banks over the last three months to spark new lending to consumers and businesses.

So far, it hasn't worked. Lending has declined, and banks that got government money on average have reduced lending more sharply than banks that didn't.

Consider the case of Bethesda's EagleBank, which received $38.2 million from the Treasury Department in early December.

The company, which focuses on lending to local businesses, was delighted to get the money, executives said. Its nine-member board convened an impromptu conference call during the week of Thanksgiving to approve the deal.

But EagleBank used roughly half the money to digest the acquisition of Fidelity & Trust Bank, a Bethesda rival with financial problems.

And it has struggled to use the rest to increase lending.

The government investment boosted EagleBank's capital, a cash reserve that regulators require banks to hold as a cushion against losses. More capital meant EagleBank could make more loans, but the company has not been able to take advantage. Lending also requires deposits, the money that banks give to borrowers, and EagleBank's deposit base shrank over the past three months.

"You look around and everyone is saying, 'Banks are not lending,' " said Ronald Paul, EagleBank's chairman. "Well, we'd like to. I could grow my loan base considerably if I just had the deposits."

EagleBank's struggles are part of a broader national pattern and illustrate the complexity of the government's attempt to prop up the economy. Rather than investing in the banks best equipped to increase lending, the government invested disproportionately in banks that needed money to solve problems. Those banks often were ill-equipped to increase lending because of financial limitations such as a lack of deposits.

Senior administration officials have said, though, that they are largely satisfied with the results of the first round of investments. They say the true achievement is something that did not happen: The banking system did not collapse.

But the volume of loans outstanding from U.S. banks fell about 1 percent during the last three months of the year, according to Federal Reserve data. The decline was more than twice as large among banks that accepted taxpayer funds, according to an analysis of fourth-quarter financial reports from 115 companies. The Fed reported yesterday that most banks have continued tightening lending standards.

Some of the first banks to get funding, such as Citigroup and J.P. Morgan Chase, have reported the sharpest drops in lending. In the face of public pressure to use the money, Citigroup plans to announce today that it will spend $36.5 billion on increased lending because of the government's investment in the company.

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