Why Banks Do Not Lend On Certain Loans That Appear Conservative - Part 3

Another aspect that impacted banks' ability to make loans to less than stellar borrowers is that they are similar to corporations in that they rely on their good ratings (from S&P and Moody's for example) in attracting either deposits or floating paper themselves (through Wall Street's ability to attract bond financing). From a deposit standpoint, although deposits are FDIC insured up to $250,000, many banks that have lower than AAA ratings find they have to pay higher yields to depositors in order to attract money. From a bond offering standpoint, the higher the rating, the lower the rate the banks have to pay their bond holders. If a bank makes loans that appear "questionable", they risk having their rating lowered and it ends up costing them in the long run. They find it better to avoid loans that may potentially give the bank a blemish, even though they would have earned a higher yield on the mortgage being provided to the borrower who appears to be below triple A in terms of ability to repay.