2.8% drop in lending is largest since 1984
Reduction, especially by large banks, seen as impediment to recovery

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, November 25, 2009

Lending by U.S. banks plunged by 2.8 percent in the third quarter, the largest drop since at least 1984 and the fifth consecutive quarter in which banks have reduced lending, the Federal Deposit Insurance Corp. reported Tuesday.

The decline in lending is emerging as a serious impediment to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations.

Large banks, the beneficiaries of billions of dollars in federal aid intended to spur new lending, were responsible for a disproportionate share of the decline, the FDIC said. "We need to see banks making more loans to their business customers," FDIC Chairman Sheila C. Bair said Tuesday.

Bair renewed her call for the government to spur lending by helping banks sell troubled loans, freeing up money for new lending. The Obama administration has considered several versions of such a program but so far has resisted calls to proceed.

The FDIC reported the lending data as part of a quarterly review of the health of the banking industry. Banks posted an aggregate profit of $2.8 billion in the third quarter, swinging back from a loss of $4.3 billion in the second quarter, the FDIC said.

About a quarter of banks continued to lose money, however, and regulators closed 50 banks during the third quarter.

The cost of cleaning up failed banks has depleted the FDIC's insurance fund, which repays depositors in those banks. The FDIC said the fund had a negative balance of $8.2 billion at the end of September. The agency plans to collect $45 billion from the banking industry at the end of the year, an amount it projects will cover the cost of failures over the next several years.

The level of the insurance fund does not affect the safety of insured deposits, as the FDIC is ultimately backed by the Treasury.

The FDIC said that just three new banks were created during the third quarter, the smallest number since World War II.

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