Saturday, November 1, 2008

Was There a Systemic Banking Crisis?

A group of researchers at the Minneapolis Federal Reserve has a new study out that argues that Federal Reserve data indicates that that many of the stories that have animated the political discourse about the bailout are incorrect. The four points the researchers make are:

1. There has been no drop in bank lending to non-financial corporations and individuals.

2. Interbank lending has remained robust.

3. Commercial paper (short term debt financing) for non-financial businesses has remained steady.

4. 80% of the financing of non-financial corporate businesses is done through bond financing, not bank loans, which makes the claim that disruptions to the banking system threaten corporate finance questionable.

I'm not sure what to make of this data. I suspect it doesn't tell us everything, but it certainly makes one pause. It's worthwhile noting that a lot of the evidence for systemic disruptions was anecdotal--that a GM dealership in Chattanooga was tightening up its lending standards, for example (NPR had something like that as an example). That hardly shows that banks aren't willing to lend because of fears of other banks' insolvency--it just shows a sensible caution given that many formerly creditworthy consumer borrowers are now underwater on their houses.

On the other hand, the amount of money that banks were parking at Federal Reserve Banks (without interest at the time) shot up from something like $300 million at the start of September to $31 billion by early October. (See here, under Deposits with F.R. Banks Other than Reserve Balances, Other) That's a sign of serious interbank mistrust.