Bernanke's Operation Twist to Spur Loan Growth at Citigroup and JPMorgan

Banking stocks have been volatile since the Federal Reserve announced it will push long term interest rates lower. On the upside, “Operation Twist” is designed to spur loan growth — something banks have struggled to regain in the aftermath of the recession. Likewise, banks and other financial institutions have been reluctant to lend money as they continue to strengthen up their balance sheets in the aftermath of the housing bubble collapse in 2008.

In its statement, the Fed noted that the economy is growing slowly, unemployment is high and housing remains in a prolonged slump. The central bank said in a statement that operation twist was aimed at reducing the cost of borrowing for businesses and consumers, including the cost of mortgage loans. It hopes that the lower rates will encourage companies to build new factories and hire more workers, and consumers to start spending again on homes and cars and clothes and vacations.

In recent quarters, major banks have begun to post improved credit quality. More thorough and cautious credit checks have led to fewer delinquent loans and greater financial stability. As such, Banks are setting aside less money to cover bad loans, and some are seeing loan losses recede. While credit quality improved, the high unemployment rate has been damaging to banks’ long term loan growth.

Operation Twist is not without its controversies. Richard Fisher, president of the Federal Reserve Bank of Dallas, said he opposed the Fed’s latest attempt to boost economic growth because he fears it won’t work and it could scare consumers and squeeze bank earnings. Fisher said the move, dubbed Operation Twist, could prove counterproductive. It might signal to consumers that the Fed believes the economy is “in worse shape than they thought” and prompt them to hoard money, Fisher said.

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