Finally, Some Real Loan Growth At The Banks

by: John M. Mason

It finally looks as if the commercial banking system is starting to do some serious lending. My last review of the banking statistics focused on the continued flow of funds in the United States banking system to foreign banks and then to deposits in the foreign offices of these banks.

At the time, this flow of funds dominated everything else going on in the banking system…especially the lending activity. There had been a little pick up in commercial and industrial (business) loans at the largest 25 domestically chartered banks in the last quarter of 2011, but the increase was not too exciting.

Over the last two months or so, business loans at commercial banks have picked up more steam and a good portion of the increase has come at the other (approximately) 6,265 “smaller” commercial banks in the banking system. Also, commercial real estate loans and residential loans (home mortgages) showed some strength over the past two or three months at these “smaller” commercial banks.

For the last two years or so I have been looking for some life in the lending portfolios of commercial banks. I believed that the economy was growing but very modestly. My concern was that there was so much debt in the economy, household as well as commercial (both in terms of business loans and commercial real estate) that the economy would continue to drag along without much oomph.

My concern was that households and businesses still needed to do additional de-leveraging before the commercial banks would start lending again and commercial banks needed to start lending again before there would be much life in the economy in terms of economic growth.

Now, I believe, we are really starting to see some life in bank lending. Over the past three months, loans and leases on the books of commercial banks in the United States increased by just about $80 billion. Of this total, $54 billion came in the past month.

And, to me the surprise in these numbers was the fact that over 85 percent of the increase in these loans came at the (approximately) 6,265 “smaller” banks in the United States. The totals for these smaller banks were $69 billion and $46 billion, respectively.

Loans and leases on the books of the largest 25 domestically chartered banks in the United States continued to increase over the past three months, but not at the pace experienced by the other banks. Not only did commercial and industrial (business) loans increase at the “smaller” banks but there was a pick up in real estate area as well, something that had been sorely missing in earlier.

Whereas commercial and industrial loans at the largest 25 domestically chartered banks rose by almost $26 billion over the last three months, these loans rose by over $20 billion at the “smaller” domestically chartered banks. In the last month the increase was less that $8 billion at the largest banks and over $10 billion at the “smaller” ones.

The surprise was that commercial real estate loans rose by $17 billion at the “smaller” banks over the last three months while they continued to decline at the largest banks. Furthermore, residential real estate loans rose by more than $23 billion at the “smaller” banks in the last three months with $16 billion of this increase coming in February 2012.

To me, this loan growth is GOOD! It is good for the banks and it is good for the economy. Let’s just hope it continues!

As far as the foreign-related banking institutions are concerned, cash assets at these banks rose by just about $260 billion over the past twelve months which was 75 percent of the increase in the cash assets of ALL commercial banks in the United States. This was the concern mentioned in the first paragraph of the post.

The thing about this that we have been watching so closely is that at these banks, Net Deposits to Foreign Offices rose by almost $480 billion during the same time. The timing of these increases coincided with the sovereign debt problems occurring in Europe and this seemed to indicate that monies being put into the American banking system were being channeled to Europe to help the banks and financial system over there.

The Federal Reserve System also moved to offset the pressure being felt by the European Central Bank (ECB) and other central banks closely connected to the eurozone by opening up its liquidity swap line with these other central banks. Furthermore, the ECB also began to lend on a three-year basis to European banks. European banks took out more than $1 trillion of these loans by March 1, 2012.

All these actions have resulted in a decline in the cash assets of the foreign-related financial institutions in the United States and basically no change in the net deposits due to the foreign offices of these institutions. Over the past three months the cash assets of this banks have declined by more than $82 billion, about $52 billion of the decrease coming in the past month.

So, for the time being, the liquidity problems arising from the sovereign debt crisis in Europe seem to have receded. However, we will need to keep our eyes on this situation as some pressure is released from the Greek situation and is transferred to other European nations like Portugal and Spain.

So, I am a little encouraged. But, I don’t want to go overboard in my enthusiasm. It is good news that commercial bank lending has increased some over the past several months, especially at the “smaller banks”. It is good news that foreign-related financial institutions seem to have slowed their demand for funds from the United States. It will be more good news if economic growth accelerates a little bit.