Here are the figures for lending at commercial banks over the past 52 weeks as reported in the Federal Reserve's H.8 statistical release.
Commercial and Industrial Loans, business loans, at all commercial banks in the United States rose by a little more than $100 billion. This represented a 6.8 percent annual rate of increase for the banking system.
Now listen, residential real estate loans on the books of commercial banks declined by a little more than $72 billion. Commercial banks just don't want to hold residential real estate loans.
Obviously, any residential real estate loans that are made by the banks are shipped off to Fannie Mae or Freddie Mac. And, this includes the largest twenty-five domestically chartered banks in the United States as well as rest of the domestically chartered banks.
The largest twenty-five banks reduced their holdings of residential real estate loans by more than $67 billion while the "smaller" banks lowered their holdings by almost $3 billion.
I will argue that the commercial banking system, especially members of the twenty-five largest banks in the system have had an impact on the residential mortgage system.
We see that there is a real restructuring going on in the housing market. As I reported in this post, "Investment bankers and lawyers are now lining up to finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out. And, this also includes hedge funds and housing construction firms.
And, guess where these loans are being recorded?
That's right, many of them are being recorded in commercial and industrial loans and this is one of the reasons why we are seeing business loans increasing.
Commercial and industrial loans are increasing but they are not going so much to increase business spending in capital purchase or inventory investment. These loans are not going so much into spurring on the productive business as to helping people that are well off take advantage of the bubble…or potential bubble…in the real estate market.
Last fall, Nobel-prize winning economist Robert Shiller argued that there was a real possibility that another housing bubble might be on the horizon.
If a significant number of buyers in the housing market are people and organizations looking to buy-to-rent in the short-run and sell-to-profit in the longer run and are not "home owners" then one can argue that there is a real possibility that the liquidity that has been supplied the financial markets are just "passing by" the productive sectors of the economy and are going into just "financial" transactions. Thus, credit velocity increases…but real output lags.
This is, I believe, has been one reason that real economic growth has been so modest in the current period of recovery.
The one real estate area that is rising is that of commercial real estate loans. Over the past 52 weeks, commercial real estate loans in the commercial banking system have risen by a little more than $72 billion. Of this increase, the domestically chartered banks smaller than the largest twenty-five have made over $70 billion of these loans.
I have argued constantly over the past six months that the rise in these loans has a good side to them and a worrisome side.
The good news is that the "less-than-gigantic" commercial banks are making loans to commercial real-estate organizations. This, I believe, puts a near-term floor under the commercial real-estate market. This will continue to stabilize the market and help it move onto the next stage where the commercial real-estate market will show more robust improvement.
The worrisome side has to do with the nature of the commercial real-estate market. Most commercial real-estate loans are five- to seven-years in maturity and are only paid off when they mature.
One of the big worries over the past five years has been the fact that a large number of commercial real-estate loans that were on the books of commercial banks came due in the latter half of 2013 and in 2014. The big concern was whether or not commercial real-estate owners and/or builders would be able to pay off their loans or re-finance their loans when they came due.
I think what has happened is that a lot of these commercial real-estate loans have been re-financed…not paid off…and that in order to support the projects, the loan amounts have been increased. This has helped to stabilize the commercial real-estate market but, in a very real sense, has kicked-the-can-down-the-road.
There is real concern that the projects these loans are financing can ultimately turn a profit and allow the borrowers to pay off the loans.
One cloud on the horizon to me is that I look at shopping malls and strip-shopping centers and I see a lot of empty space. Also, a growing trend…the closure of bank branches and grocery stores. It is on record that there was a large number of band branches closed this past year. My guess is that this trend is going to accelerate in the next few years.
Furthermore, I have been amazed about how many chains are closing grocery stores these days. I have just been in two major stores over the past four weeks…two that I could not imagine that the chains would close them…and they are being closed. Reports are that this is happening all over the country.
During the credit inflation of the past fifty years, many chains and national organizations expanded and expanded and expanded…not even considering the alternative. It is becoming apparent that this age is over. Rationalization of chain stores and branching policies are changing.
This, I believe, is going to have a massive impact on commercial real-estate because commercial real-estate has prospered over the past fifty years through the continuous credit inflation explosion. That day, I believe, is over.
And, if these changes take place in commercial real-estate, the less-than-massive domestically chartered commercial banks are going to be the banks that are hit the hardest.
So, for the banking system as a whole…I don't believe that it is out-of-the-woods yet. There numbers just don't add up in a way that they should to support a robust economic climate. We need to keep our eyes open on the banking sector. I see the commercial banking industry in the United States in a period of real decline…with the exception of the huge banking organizations. The real lending support for the growth of the United States economy is coming from the shadow banking system…if it is coming from anywhere.