Record Treasury buying by banks frustrates Bernanke

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Nov. 8 (Bloomberg) — Brian Williams burned through $12,000 on rent for a vacant storefront in the historic district of St. Louis where he planned to open a pizzeria after banks refused him a $35,000 loan, forcing him to delay opening by a year.

“There were a lot of times when I thought I was going to pack it in,” Williams, 53, said in an interview. He eventually turned to friends and smaller loans from government agencies and a microcredit lender for the money.

Rather than providing money to businesses and consumers, U.S. commercial banks are increasingly using the cash available at interest rates set by the Federal Reserve that are next to zero and lending it back to the government. Since June, the biggest banks bought about $127 billion of Treasuries, compared with $47 billion in the first half, according to the central bank. Commercial and industrial loans outstanding have fallen by about $68.5 billion this year, central bank data show.

While the Fed and Chairman Ben S. Bernanke said last week they will pump $600 billion more into the financial system through so-called quantitative easing to aid the economy and boost the flow of credit, a growing number of bond investors and strategists say the allure of government debt may only get stronger. New global banking rules will force lenders to hold a greater percentage of capital if they want to invest in riskier securities or make new loans.

Basel III

The Basel III regulations set by the Bank for International Settlements in Basel, Switzerland, may trim economic growth and result in $400 billion of additional Treasury purchases by U.S. commercial banks by 2015, a committee of bond dealers and investors that advises Treasury Secretary Timothy Geithner said in a Nov. 2 report.

“Financial institutions are less willing to take risk ahead of these new regulations than they might be otherwise,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. “One of the reasons to do quantitative easing is to make it less appealing to hold Treasuries. You’d expect this to be an environment where’d they might actually want to take on a little more risk but so far they’re not.”

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