In a speech to the Georgetown Business School on January 13, 2009, Treasury Assistant Secretary Kashkari made several comments regarding how banks were using TARP Capital funds, and why the Treasury does not believe that further requirements are necessary.  In light of continued political pressure to force banks to increase lending (or otherwise specify how to use the TARP Capital funds), we provide the highlights of Kashkari’s remarks on this matter.

Specifically, Kashkari noted that banks have strong economic incentives to deploy any TARP Capital received by the institution.  “Banks are in the business of lending and they will provide credit to sound borrowers whenever possible.  If a bank doesn’t put the new capital to work earning a profit or reducing a loss, its returns for its shareholders will suffer.”  In other words, Treasury is relying on the fundamental tenant of capitalism that banks will act in their own self-interest to make creditworthy loans.

Kashkari notes that we are still at a point of low confidence, and that as long as confidence remains low, banks will remain cautious about making loans and consumers and businesses will remain cautious of taking on new loans.  Until confidence returns, we are unlikely to see significantly more credit extended.  “We must not attempt to force them to make loans whose risks they are not comfortable with.  Bad lending practices were at the root cause of this crisis.  Returning to those practices will not held end this financial turmoil.”

With regard to tracking lending activity, Kashkari indicated that Treasury intends to use the existing quarterly call reports to study changes in balance sheets (and to compare against institutions that did not receive TARP Capital).  Treasury also plans to supplement call report information with monthly data collection from the largest banks.