Monday, January 25, 2010

Interesting perspective on bank activities

Peter Wallison of the American Enterprise Institute has a great take on the activities of banks, and why the government has had a role in limiting their opportunities.

As small regional banks have virtually NO chance of landing advisory or capital-raising fees from companies in need of said capital, they have nowhere to go but real estate lending:

"Banks have been committing themselves increasingly to financing real estate. The reason for this is simple. Because they cannot underwrite or deal in securities, they have been losing out to securities firms in financing public companies—that is, most of American business other than small business. It is less expensive for a company to issue notes, bonds or commercial paper in the securities markets than to borrow from a bank.

Where, then, can banks find borrowers? The answer, unfortunately, is commercial and residential real estate.

Real-estate loans rose to 55% of all bank loans in 2008 from less than 25% in 1965. These loans will continue to rise in the future, because only real-estate, small business and consumer lending are now accessible activities for banks.

This is not a good trend, because the real-estate sector is highly cyclical and volatile. It was, indeed, the vast number of subprime and other risky mortgages in our financial system that caused the weakness of the banks and the financial crisis. Requiring banks to continue to lend to real estate, because they have few other alternatives, virtually guarantees another banking crisis in the future."

Copyright 2010 AlphaNinja

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