Bank Lending Keeps Its Foot On The Gas

by: Calafia Beach Pundit

Bank lending to small and medium-sized business has been increasing at double-digit rates for the past year, as shown in this chart of Commercial & Industrial Loans. The net increase in lending since late 2010 now amounts to an impressive $237 billion. C&I Loans are up at a 16% annualized pace over the past six months, and up 13.8% relative to a year ago.

This series continues to be a sign of improving economic and financial fundamentals. On the margin, banks are increasingly willing to lend and businesses are increasingly willing to borrow. With $1.49 trillion of bank reserves still sitting idle as "Excess Reserves" on deposit at the Fed, banks have no constraint on new lending other than their own prudence. Businesses may still feel like lending is constrained, but on the margin things are definitely getting better, and this reflects increased confidence on the part of both banks and businesses. And increased confidence, in turn, is an important ingredient for new investment and eventually new hiring and more economic growth.

Increased bank lending has also been a source of the ongoing expansion of the broad money supply. M2 is up about $1 trillion since C&I Loan growth started growing in late 2011, with almost all of that increase coming in the form of new savings deposits, whose growth still shows no signs of abating.

It's tough to find any sign here that money is in short supply or that the Fed needs to do more to promote the expansion of the money supply. The reason there is not more money circulating in the economy is that people still just want hold an awful lot of it in the form of savings deposits, even when those deposits pay almost no interest. The economy is still dominated by risk aversion, in other words, but on the margin things are getting slowly better.