The original purpose of the Troubled Asset Recovery Program (TARP) funds included enabling banks to make loans to boost economic activity. But lending by banks is at a low point—even lower than it was during the Great Depression.
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The Federal Deposit Insurance Corp. (FDIC) reported that the ratio of increased lending to the nominal GDP reached a peak of 1.75 between 2001 and 2008. The previous historic low for that ratio came during the Great Depression and was a multiple of .64. Today, the ratio
is at a multiple of .31.
US banks are struggling to reinvent their business models as a result of increased regulation which evens competition between regulated and non-regulated financial institutions. Smaller institutions are getting swallowed up, increasing consolidation in the industry.
The economy is on a recovery track despite the historic low lending levels. Investors’ appetite for risk seems to have returned and the retirement of personal debt coupled with improvement on the employment front seems to be fueling equity markets. S&P 500 returns for the last quarter of 2012 are projected to reflect a 15.5% rate of growth.
This is triple the rate predicted for third quarter returns. The deterioration of European sovereign debt is still a concern, however, and continues to inject an element of uncertainty about the health of the recovery going forward.