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JPMorgan: Don't blame us for slow recovery

January 31, 2013: 2:13 PM ET

Economist at JPMorgan says big banks aren't the reason why lending hasn't recovered faster. He's wrong.

big_banksFORTUNE -- Apparently, Wall Street still hasn't learned that those who live in glass houses shouldn't throw stones. Particularly when said glass house can be seen from space. And it's protected by the government.

This week, an economist in JPMorgan Chase's (JPM) asset management unit, Michael Cembalest, took a look at why lending hasn't rebounded faster in this recovery. The financial crisis is long over. However, business lending has only recently started to increase again, and only minimally. Last year's mini-boom in mortgage lending was nearly 90% refinancings, not new loans.

So this is a good question. Unfortunately, Cembalest doesn't really tackle it. Instead, he pivots pretty quickly to look at who is to blame the most for the credit crunch: The big banks or their smaller rivals. And Cembalest's conclusion is pretty predictable from someone whose paycheck comes from the biggest bank in the nation. He writes, "The results show that larger banks have generally been providing more credit relative to their ability to do so." Small banks, not so much.

MORE: The refinance boom has peaked

To get to this conclusion, Cembalest doesn't look at the traditional measure of a bank's ability to lend, which is how much it has in deposits, and how much of that money goes to loans versus how much stays in the vault. Instead, Cembalest broadens the definition of lending to include not just bank loans, but bonds as well.

That's not such a bad idea. Most large corporations, and many smaller ones, do a large portion of their lending by issuing debt to bond investors. Here's where Cembalest goes wrong. He gives the credit for that lending to the big banks and Wall Street firms that underwrite those bonds. But they're not the ones really making those loans. Investors are the ones who are putting their money on the line. The banks are just the go between. That is especially true for mortgage loans, which banks almost immediately turn around and sell to Fannie Mae and Freddie Mac. So that's not the banks extending credit -- that's the government doing it. The result is that Cembalest comes to the bizarre conclusion that Morgan Stanley (MS) is the most efficient lender in the nation, even though among the big banks Morgan Stanley does the least lending by far. JPMorgan somehow finds itself among Cembalest's best lenders too, along with Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC).

The other problem is that the Cembalest compares the amount of lending the banks are doing to the amount of capital they have. But that's not a fair comparison. Large banks almost always hold less capital relative to their loans than small banks, even when they are not lending. They can do so because of the assumption that if they run into trouble the government will bail them out. Small banks can't tell their investors that.

The better way to measure all of this is to compare bank lending to deposits, which is the real money banks have to lend out. Based on that measure, big banks have dropped their lending to the lowest levels in decades, just 76% of deposits, according to Bankregdata.com. Midsized banks, on the other hand, like New York Community Bank, or Synovus Bank, which is based in Columbus, are lending out 83% of their deposits.

MORE: Why community banks need a break

And you can argue that the bond market has changed the way money is lent. But that change has been happening over decades. And yet the drop off in lending compared to deposits, which used to be above 90% at the big banks, only came after the financial crisis.

Worse, these days, more and more of the nation's deposits are flowing to the largest banks. So yes, we do need big banks and Wall Street firms to underwrite bond offerings. But we don't need those same banks to be black holes for our nation's deposits, giving them cheap money that they, or their traders, namely JPMorgan's London Whale, can bet on credit derivatives or elsewhere. If you are looking for a reason for why there hasn't been more lending in the wake of the financial crisis, that's probably a good place to start.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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