Investors waiting for the big banks to turn it around after 2007’s subprime debacle might be waiting a long time, the Wall Street Journal warns. The credit crunch has unraveled a complicated modern banking model that gave big firms nearly total balance sheet flexibility. “It was a different world,” said one analyst. Now, banks must “think real hard about their new business model.”
Before the crash, banks would turn the loans they made into securities and sell them to investors, while arranging off-the-balance-sheet financing vehicles to keep capital costs low. Now, banks are forced to hold the loans they make, which will produce uglier balance sheets and fewer loans. “Lending is going to be tight for the next year or two,” one analyst predicts.