Lending Rises Among Banks That Raised Government Funds

As the credit markets were seizing up last fall, the Treasury Department established the so-called Capital Purchase Program to stimulate bank lending. Has it worked?

About as well as could be expected. In the second quarter, banks that raised money through the program made an aggregate $287 billion in loans per month to individuals and businesses, up from $240 billion per month in the fourth quarter of 2008, according to a new GAO report. That’s not a massive leap, but it’s significant given the tightening in lending standards and that credit usually wanes during economic recessions.

In all, the 21 biggest institution participating in the CPP, part of the Troubled Asset Relief Program, have extended a total of some $2.3 trillion in new loans since the program booted up. Bank of America, which received $15 billion in funds under the program, has laid out the most, with $579 billion in new loans (click on chart to expand).

Other government programs aimed at thawing the credit markets also are having effect. The Federal Reserve launched the Term Asset-Backed Securities Loan Facility, or TALF, to jump-start investor demand for asset-backed securities, which would spur lending to consumers and small businesses on everything from student loans to car financing.

That support appears to be working. From November 2008 to May 2009, the average rate on automobile loans from finance companies declined to 3.5 percent, well below the average bank rate of 6.8 percent.

That’s the good news. The bad news is that it’s still unclear if taxpayers will get stuck with the tab for all this munificence. Says the GAO:

While progress has been made in establishing TARP, much remains uncertain about the program, including whether it will pay for itself or prove to be a cost to the taxpayers.

Hold on to your wallet.