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I don't know when I have ever seen such a divergence in the banking data in the H.8 release of the Federal Reserve.

It seems as if the largest twenty-five domestically chartered commercial banks in the United States are doing exactly the opposite of what the rest of the domestically chartered commercial banks are doing.

Over the past 13-week period the business loans (Commercial and Industrial loans) of the largest domestically chartered commercial banks have declined… and the pace of decline seemed to pick up in August and September.

In the rest of the domestically chartered commercial banks, C&I loans increased, by almost $8.0 billion in the last 13 weeks and by almost $4.0 billion over the past four weeks.

An even more dramatic picture is forthcoming in the real estate lending area.

Residential loans at the largest domestically chartered banks fell by over $47.0 billion in the last 13-week period (they fell by about $10.0 billion over the last four weeks). Residential loans at the smaller banks rose by over $20.0 billion during the same time period (and they rose by about $10.0 billion over the last four weeks).

But commercial real estate lending increased by more than $31.0 billion at the smaller domestically chartered banks in the last quarter while these loans declined by about $8.0 billion at the largest twenty-five domestically chartered institutions.

I have called attention to this latter difference before. In this post I wrote:

"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 many of the loans have matured and they have 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."

In order to do this lending, the smaller domestically chartered commercial banks are getting rid of securities and cash.

Securities holdings at the smaller commercial banks have fallen by slightly more than $44.0 billion over the past 13-week period, and by almost $34.0 billion over the last four weeks.

Furthermore, these smaller banks have reduced their cash assets by almost $4.0 billion over the past four weeks.

The total assets of the smaller banks have fallen by almost $13.0 billion over this same time period.

The largest twenty-five domestically chartered banks? Their cash assets have grown by over $145 billion over the last 13 weeks, and by almost $60 billion over the past four weeks. Their total assets continue to rise and their securities holdings have also recently risen.

Stating my main point again: I don't know when I have ever seen such a divergence in the banking data in the H.8 release of the Federal Reserve.

Balance sheet-wise, it seems the largest twenty-five banks are doing just the opposite of what the rest of the commercial banking system is doing.

The largest banks are reducing their loans, particularly their real estate loans and becoming more and more liquid.

The smaller banks are increasing their loan portfolios, especially their residential and commercial loan portfolios, and becoming less liquid.

One suggestion is that the largest banks, when they are lending, are lending to hedge funds, asset managers, the home management divisions of construction companies, and to wealthy people to acquire real estate. Thus, the largest banks can get rid of residential and commercial real estate loans and have the loans they make for these purposes show up elsewhere. And they, the largest banks, do not have to directly deal with real estate loans, but only have to deal with those that have lots of cash themselves. But these well-to-do entities are not buying the real estate to live in it… so they have the money to hold onto these properties and rent them… for a long time.

The smaller banks… well, they have to deal directly with the borrowers that use real estate as collateral. And the loans are to individual families and individual contractors. As a consequence, these banks are the ones that are really exposed if the current real estate rise turns out to be just another credit bubble. I call your attention to the recent article of the economist Robert Shiller: "Housing Market is Heating Up If Not Yet Bubbling."

It is not the case that both the largest banks and the smaller banks can be right about their portfolio choices. Stay tuned!

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.

Source: What Do The Biggest Banks Know That Smaller Ones Don't Know - Or Vice Versa?