Bank Lending: Helping The Recovery?

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by: John M. Mason

Are commercial banks helping the recovery yet? The commercial banks in the United States have seemingly been absent through most of the four years of the current economic recovery.

For example, if we look at all loans and leases at commercial banks in the United States, on March 27, 2013, we stand only a little over 4.0 percent of the volume of loans and leases in the banking system in early July 2009, the month the current recovery began. Looking at Commercial and Industrial loans (C&I loans), business loans, commercial banks now hold only 3.0 percent more loans now that they did in early July of 2009.

Usually bank lending helps to lead the economic recovery. Well, business loans did increase by about 1.5 percent, from July 2010 to July 2011. From July 2011 to July 2012, they jumped by 15.0 percent. However, from July 2012 through March 2013 business loans were only up 7.0 percent.

Unfortunately, it does not look as if C&I loans are expanding that rapidly this year. The latest Federal Reserve Statistics (H.8 release) show that business loans at all domestically chartered commercial banks have risen by $35.5 billion over the past 13-week period, up $19.5 billion in just the last four weeks.

Of the $19.5 billion in Commercial and Industrial loans (C&I loans) made over the past four weeks, $17.0 billion came from the largest twenty-five banks in the country. Over the past thirteen weeks, the largest banks added almost $25.0 billion in business loans, a little more than $8.0 billion per month. This is down from the monthly average over the past 12-month period, when the largest twenty-five banks in the country added, on average, a little more than $9.0 billion in loans every month.

So, business loans are increasing but the pace seems rather tepid, just like the economy. This is not the case, however, in terms of real estate lending at commercial banks.

Real estate loans are down by just under $18.0 billion over the past 13-week period, and down by almost $11.0 billion over the past four weeks. They are down by about $1.5 billion over the past year.

In both of these categories, the split between the largest twenty-five banks in the country and the rest of the domestically chartered banking system is interesting. At the largest banks, real estate lending is down by $22.0 billion over the past 13 weeks with $16.0 billion of the decline coming in the past four weeks. The opposite happened in the rest of the banking system: real estate lending actually rose over the past 13 weeks by about $6.0 billion with almost $5.0 billion of the increase coming in the past four weeks.

Remember that the largest banks generally don't originate residential mortgages to hold, but sell them off rather quickly to Fannie Mae or Freddie Mac. The rest of the banking system tends to hold onto more of the residential mortgages it makes.

The conclusion one can draw from these data is that business lending is increasing over the last quarter but at a declining rate. It is hard to say this is due to the weather because of the big jump in business lending at the largest banks came in March. However, this year, in general, business loan growth has not been as great as it was last year.

Real estate lending at the commercial banks seems to be very modest, at best. The economy is growing and bank lending is rising … just not as much as one might expect at this stage of the recovery. One interesting statistic that comes out of the latest banking statistics concerns money flowing from the United States off shore, presumably to Europe.

Foreign-related financial institutions in the United States have a liability account titled "Net Due to Foreign Offices." This account is usually active when there are financial disruptions occurring in Europe. Well, over the past 13-week period, net due to foreign offices rose by $74 billion. So, funds seemed to be flowing out of the United States … presumably to Europe.

In the week ending March 27, this account fell by over $40.0 billion! That is, in the 12 weeks ending on March 20, 2013, the outflows totaled nearly $115.0 billion before falling $40.0 billion in the week ending March 27.

These flows had to be related to the situation in Cyprus! Just another indication of how the United States financial system helps to underwrite financial disruptions in other parts of the world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.