In the year since the Troubled Asset Relief Program was enacted by Congress under pressure from Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson, the nation’s commercial banks reduced  loan balances by more than $400 billion and increased their cash-on-hand by over $500 billion, according to a report by the Federal Reserve.

The weekly report on commercial bank assets – issued on a two-week lag – showed commercial banks had just under $1 trillion in cash assets – $993.4 billion – at September 30 compared with $493 billion a year ago. The report for September 30 was released Friday (Oct 9).

The TARP was enacted with a variety of specific objectives but primarily to provide banks with resources to keep credit markets active.

Instead, according to the Federal Reserve report, commercial bank credit has fallen in just about every category. The largest exception was for home equity lines of credit which increased from about $539 billion outstanding a year ago to just over $600 billion.

“Closed end residential loans,” which include first mortgage loans, increased to $1.48 trillion from $1.45 trillion a year ago, a modest 2.4% increase. Consumer loans increased to $841 billion from $834 billion one year earlier with “other consumer loans” which include auto loans, accounting for $4.7 billion of the $7 billion increase.

By contrast, commercial and industrial lending has plunged $217.6 billion or 12% in the last year. Businesses use the proceeds from such loans for general operating purposes including payrolls, inventory and investment.

The reluctance of banks to put the funds they received to use is one factor which has kept inflation – generally defined as too many dollars “chasing” too few goods – at bay. When total monetary demand exceeds the value of available goods and services, an economy becomes subject to inflationary pressures.

Bank lending slowed – and accumulation of cash increased – between the announcement of plans to conduct “stress tests” on financial institutions in February and the disclosure of the results in May.  Commercial lending dropped about $78 billion during that period while cash assets increased about $225 billion.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.

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