AgentMortgage

Why banks hoard bailout money

The lesser of two evils: no capital or no loans?
Published on Jan 26, 2009

"Is it not shameful that our financial institutions receive capital infusions from the government, and instead of lending it out, they hoard it?" I hear this complaint a lot, and the U.S. government has not done a very good job of responding to it. My view of government intent is that the capital infusions were meant to be "hoarded," defining that word to mean adding to the firm's capital rather than adding to its loans. A necessary backdrop: The financial crisis began in the home mortgage market, and then spread like wildfire to engulf the entire financial system. The core reason for the conflagration was that financial institutions were "overleveraged" -- meaning that their debt was excessive. They were also "undercapitalized," which means the same thing. Consider a financial firm that has $100 billion of earning assets, $90 billion of debt, and $10 billion of capital, which is the difference between its assets and its debts. The ma...

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