Sharp decline in lending is largest since 1984

The decline in lending is emerging as a serious impediment to economic recovery. Banks reduced the amount of money extended to their customers by US$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 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 US$2.8 billion in the third quarter, swinging back from a loss of US$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 US$8.2 billion at the end of September. The agency plans to collect US$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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