Banks Buying Treasuries Instead of Lending

Friday, 30 Apr 2010 09:56 AM

By Dan Weil

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Banks remain cautious about lending in the wake of the financial crisis and are instead using their newly beefed-up capital to buy Treasuries.

In March, banks reportedly absorbed $5.7 billion of the total $34 billion in auctions of 10-year Treasury notes and 30-year Treasury bonds.

At the same time, bank credit dipped 5.1 percent and loans and leases slid 6.4 percent last month, according to the Federal Reserve.

The fear of taking any risk has made banks reluctant to lend money to consumers and small businesses. And a weak economy is crimping demand for loans too.

"Not only has lending been tight but demand for loans has been pretty small," Kim Rupert, managing director of global fixed income analysis at Action Economics, told CNBC.

Not everyone is happy about the development.

"Banks are stealing money from the public, giving consumers zero percent interest on deposits, and instead of turning over risk to the over-indebted consumers, they're loaning money to the government," Michael Pento, chief economist at Delta Global Advisors, told CNBC.

To be sure, the Treasury purchases could be a precursor of banks freeing up cash to lend, according to a Deutsche Bank report cited by Forbes.

The report, written by analysts Mustafa Chowdhury and Marcus Huie, says, "The recent purchases of highly liquid, high-quality securities perhaps indicates a tentative deployment of these cash holdings, while at the same time keeping capital requirements low."

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