Bank Lending: Not Particularly Strong And Not Really Supporting New Economic Growth

Includes: IYF
by: John M. Mason


Bank lending has been increasing but with little or none going directly into residential real estate.

Banks, smaller than the largest 25 domestically chartered banks, continue to renew commercial real estate loans hoping they will pay off.

Large amounts of money pumped into the banking system continue to go to foreign-related institutions.

In the first quarter of 2014 and a little more, commercial bank lending seemed to be picking up a bit, lending encouragement to the thought that economic growth might be picking up.

However, in May the numbers on bank lending did not appear to be so optimistic.

Business loans, primarily in the largest 25 domestically chartered banks in the United States and foreign-related banks seemed to keep up the pace, but the lending in the smaller banks…the rest of the banking system…seemed pretty dismal.

Also, the "less-than-large" domestically chartered banks really seemed to back off in the real estate area, a place where they had been the only really strong point over the past year.

Business lending was up at the largest 25 domestically chartered banks by almost $9.0 billion in the four-week period ending May 28, 2014. This is not a real strong total, historically, for periods of economic recovery, but it is better than the average of a $7.0 billion rise per month over the past three-month period and an average of $5.0 billion per month over the past 12-month period...Business lending in the rest of the domestically chartered banks were down substantially in the past four weeks.

One question I have continually raised about the business lending in the largest 25 domestically chartered banks over the past year has been about the nature of the borrowers. Circumstantial evidence points to a lot of this lending going to hedge funds and other players that are taking advantage of rising asset prices. If this is true, then a lot of the business lending taking place is not going to productive uses that contribute to rising economic growth.

This is consistent with the concern that the efforts of the Federal Reserve System to create a wealth effect through its policy of quantitative easing is primarily rewarding the wealthy and is not filtering through to those that would channel the money into consumption purposes.

More surprising is the fall off in the lending on real estate by the rest of the domestically chartered commercial banks.

In terms of residential mortgages, the largest 25 banks have basically left the market in terms of holding mortgages on homes. Over the past 52-week period, these large banks have seen a reduction of residential mortgages on their balance sheets of almost $73.0 billion. This reduction, year-over-year, is about 6.5 percent of their May 29, 2013 total.

Over this time period, the smaller domestically chartered banks have increased their residential lending on their balance sheets by over $33.0 billion although most of the increase came in March and April. For these "smaller" banks, the increase in May was only modest, indicating some backing off of further lending in this area.

The strongest area in lending for the "smaller" banks remains commercial real estate loans. Over the past year these banks have increases loans to commercial real estate on their books by almost $90.0 billion. This is a substantial increase for these organizations, accounting for more than a 10.0 percent rise.

The concern with this increase, as I have written about almost every month over the past year and more, is that many of these loans are just "renewals" will a "bump-up" in loan amount. The situation here is that over the past few years there were a lot of commercial real estate loans that came due. These were one payment at maturity loans and many of the loans were questionable during the Great Recession and into the subsequent economic recovery.

As the recovery progressed, these loans matured and came up for renewal since the projects had been slowed down or suspended during the bad economic times. The conditions surrounding these loans became sufficiently healthy that the banks…and the regulators…could, in good conscience, renew the loans. However, because of the delays and the changing circumstances pertaining to the loans, more borrowed money was needed to keep the projects viable.

So, the loans were renewed with advances of additional cash. This is why the commercial real estate loan volumes are increasing at these "smaller" banks.

One additional note, almost two-thirds of the commercial real estate loans in this country are made by the "smaller" domestically chartered banks.

Other lending in the commercial banking system was unimpressive.

Just two other points I would like to make.

First, the "smaller" domestically chartered banks continue to account for a smaller and smaller proportion of the banking assets in the United States. As of May 28, 2014, the "smaller" banks accounted for only 27.9 percent of the banking assets in the United States, down from 28.3 percent a year ago.

It should be noted that the largest twenty-five domestically chartered banks saw its share of the banking assets drop in the past year from 55.7 percent to 54.7 percent.

Obviously, for the fifth year in a row, the proportion of bank assets in foreign-related financial institutions increased. These foreign institutions have been creeping up on 20.0 percent of the banking assets. Think about this…almost three out of every four dollars in banking institutions in the United States are held by either the largest twenty-five domestically chartered banks and foreign-related institutions.

The second point is this: the Federal Reserve as we know has pumped a lot of "excess reserves" into the banking system. These "excess reserves" show up as "Cash Assets" on the balance sheets of the banking system.

On May 28, 2014, the commercial banking system held $2.770 trillion of cash assets. The largest 25 domestically chartered banks held a little more than 36 percent of these cash assets.

Foreign-related institutions held 51 percent of these cash assets!

And, of this 51 percent of the cash assets, around 40 percent of the cash assets in foreign-related institutions were seemingly moved off-shore in net deposits held at their related foreign offices. The Federal Reserve has done a good job, not only in supporting the wealthy, but also in helping to provide funds to other countries in the world…although we believe these latter funds went primarily to Europe.

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