When sustainable real growth is in sight, banks will want higher returns and start lending at a quicker pace.
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Not only are banks unable to continue lending at anything like their previous pace, but capital markets are now sucking money out of the diminished pool available for mortgage lending.
But the pace of bank lending is unsustainable, and America's recent experience suggests that it is better to prevent bubbles forming than to mop up the mess afterwards.
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Already, some believe that hot money exiting the country helps explain why this year Chinese banks have increased lending at a much slower pace than most observers expected.
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In France, Italy and the Netherlands, the pace of small-business lending rose more than five percentage points in 2010 from 2009.
Based on the size of external and budget deficits, inflation rates and the pace of growth in bank lending, India, Turkey and Hungary were deemed to be most vulnerable.
Paulson called for the licensing of mortgage brokers and he said regulation had to be strengthened to keep pace with all the recent innovations in home lending.
The RBI is widely expected to cut its key lending rate by a quarter of a percentage point Tuesday to stimulate an economy growing at its weakest pace in a decade.
The local currency hit a 10-month low and bond prices fell to their lowest in two weeks as markets were expecting the Reserve Bank of India to cut its policy lending rate at its June 17 meeting to help boost economic growth that has slowed to its weakest pace in a decade.
Since so many small banks have now tapped LTRO, hopes are rising that as well as slowing the pace of bank deleveraging and propping up sovereign-bond markets, the liquidity may encourage new lending to the real economy.
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While bank lending continues to contract, financial market conditions remain supportive of economic growth and the FOMC expects a gradual, moderate pace of recovery.
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