Synovus Shows Why Banks Aren't Lending

Synovus Financial's (SNV Quote) recent $200 million increase to its fourth-quarter loan-loss provision illustrates the folly of critics' cries for banks to immediately use government bailout money to begin making loans again.

Synovus, the Columbus, Ga., holding company, saw shares close down 13% to $7.17 Monday, after it said over the weekend that its fourth-quarter provision for loan losses would increase $200 million from the third quarter to $350 million -- not $250 million, as it announced on Friday. Several prominent analysts responded by lowering their earnings estimates. The Thomson Reuters fourth-quarter consensus was a loss of 36 cents per share. The company is scheduled to report earnings on Jan. 22.

In the case of Synovus, which has received $968 million from the Treasury's $700 billion Troubled Assets Relief Program, or TARP, it's pretty clear that expected loan losses could eat up a significant portion of that capital over the next year.

Objections to the capital infusions were expressed in the Dec. 10 "First Report," of the Congressional Oversight Panel for Economic Stabilization, chaired by Harvard law professor Elizabeth Warren.

The panel asked if the capital infusions had "increased lending and unfrozen the credit markets or simply bolstered banks' books," a jab that signaled some hostility to the industry. Treasury, in its Dec. 31 response to the panel's report, said its efforts had mitigated the risk of a wider systematic breakdown.

But considering that it takes time for loan losses to play out, "bolstering bank's books" may just be the right medicine to help a company like Synovus ride out the losses.