I have not looked at the commercial banking statistics published by the Federal Reserve (the Fed's H.8 release) for at least two months, and one thing stood out in the numbers.
Over the past 52 weeks, the assets of the United States banking system rose by $725.0 billion. Cash assets in the banking system rose by about $590.0 billion, or more than 81 percent of the increase in banking assets were in cash balances.
During this same time period, the reserve balances of commercial banks at the Federal Reserve rose by $733.4 billion. Most of the money the Federal Reserve is injecting into the economy is going into cash balances, not loans or anything like that.
Even more amazing is that for every $1.00 of cash going into United States domestic banks, almost $1.00 of cash is going into foreign-related institutions.
Even more amazing, over the last 52 weeks almost every $1.00 going into the cash account at foreign-related institutions is matched on the liability side of their balance sheets by "Net due to foreign-related offices." The money is going offshore!
Over the past 13-week period, there was a $135.0 billion increase in cash assets at these foreign-related institutions and a $110.0 billion increase in "Net due to foreign-related offices." Over the past 4-week period, there was a $96.0 billion increase assets and a $64 billion increase in the "Net due…" account.
In each time period, the increase in the cash assets of these foreign-related institutions rose by more than their total assets.
Cash assets at the largest 25 commercial banks also rose over the past year, but they hardly increased at all at the "smaller" commercial banks. Over the past 52-week period, cash assets at the largest commercial banks rose by almost $302.0 billion and rose at a pretty steady pace over the year. Total assets grew by about $395.0 billion over this time period.
The problem is Total Loans and Leases at the largest 25 commercial banks have increased only modestly. The best performing loan category was business loans, which rose by about $70.0 billion, but in the past four weeks these Commercial and Industrial Loans actually declined by $4.0 billion.
Where is the business recovery coming if business loans are not rapidly increasing?
The one business category that is rising is Commercial Real Estate Loans!
And, even more surprising, the strength in commercial real estate loans is not in the 25 largest banks but in the smaller domestically chartered banks. Over the past 52-week period, commercial real estate loans rose by almost $43.0, but about three-quarters of the increase came in the smaller institutions.
This same thing occurred in the past 13-week period as all commercial real estate loans rose by almost $21.0 billion and the smaller banks had about three-quarters of this increase. In the last four weeks, these loans rose by slightly more than $6.0 billion and the smaller banks had even a greater share of these.
I am not so sure that the performance of commercial real estate loans is that encouraging. Over the past three years I have written repeatedly that the commercial banking industry was facing some real tough times in the future because a lot of their borrowers did not have to pay down their commercial real estate loans. The crucial time for these loans came with the loans matured and they had to be refinanced.
From what I can tell, it appears that these loans are getting refinanced, but more money is being added to the amount due. As a consequence, not a whole lot of new financing is going on… it is just to "old stuff" that is qualifying for refinancing, but in order to make the projects work, the borrowers need more money.
The big question here is whether or not this behavior will be the source of problems for the banks in the future. And the question that follows from this is the one concerning the smaller banks. If the vast majority of the refinancings are coming at the smaller banks, does this put these smaller banks at risk should the economy not pick up and the commercial real estate loans come due some time in the future?
I think this is a real concern. Have these smaller commercial banks just "kicked the can down the road"?
In terms of residential real estate, the picture is not so rosy.
Sales of homes may be up and the prices of homes may be rising, but this is not being reflected in the numbers at the smaller banks. Over the past 52 weeks, residential real estate loans at the smaller banks are down by about $22.0 billion. Over the past 13-week period and over the past 4-week period, they were basically flat at the smaller institutions
At the largest 25 commercial banks, residential real estate loans were down by almost $37.0 billion over the past 13-week period and down over $15.0 billion in the last four weeks.
I have three takeaways from this presentation. First, the Federal Reserve is pumping a very large amount of cash into the US banking system but a large amount of these funds are not staying in the United States. We may be helping produce financial stability elsewhere -- in Europe for example -- but don't seem to be doing too much for the American economy. Also, as the European financial markets stabilize, the United States is also facing rising long-term interest rates because its financial markets are being used less and less as a safe haven.
Second, concerning business-type loans: Commercial and industrial loans rose by a little more than 7.0 percent over the past 52 weeks, but they have actually declined over the past four weeks. I have concerns about the sustainability of this increase into the fall months. Commercial real estate loans have risen well over the past year, but there is a question about the quality of these loans given that many of them are augmented refinances. The business lending results do not point to a strong, expanding economy.
Third, real estate loans: the performance of residential real estate loans is horrible. With rising sales and rising prices, one has to ask a question about where the demand for these loans is coming from.
My answer, as found in many of the blogs I have posted over the past two years or so, is hedge funds, real estate developers, and individuals that are in the "game" to buy and prosper. These are certainly not the less-well-to-do! The loans being made to these organizations and individuals do not show up in the residential real estate category but show up in business or personal loans or in funds obtained from "alternative" finance sources, i.e., "shadow" banks.
Then there is all the money going offshore. Enough said!