Business Lending Is Picking Up At Commercial Banks

by: John M. Mason

It has been three years since the economic recovery began and business lending, finally, seems to be on a sustainable course.

Year-over-year, Commercial and Industrial (C&I) loans at commercial banks are up about 13 percent.

Much of the increase has come in recent months. Over the past four-week period, C&I loans have risen by $4.5 billion, up modestly from the $4.0 billion increase that occurred in the previous four-week period.

Over the previous 13-week span, C&I loans rose by slightly more than $30 billion.

A good piece of information is that the rise in business loans in not occurring at just the largest 25 banks in the country, as was the case earlier in this recovery.

Over the past 13 weeks, a little less than two-thirds of the increase in business loans came from the largest 25 banks. One month ago, this percentage was about 90 percent.

This is good news for two reasons. First, if any sustained recovery of the economy is going to take place, lending to "Main Street" is going to have to increase.

Second, the lending that has taken place at the larger banks has not seemingly gone into "productive" uses. Much of the business lending at the larger banks has apparently gone into the cash holdings of larger corporations for uses not yet identified. So the fact that more of the increase in bank lending is coming from the "smaller" banks in the country is encouraging.

Residential real estate loans, i.e., mortgages, have also been increasing in recent months. Much of the increase has come in the last six weeks or so, with $14 billion of the increase coming in the past four weeks. The interesting thing about the rise in mortgage lending is that a large part of the increase -- almost 90 percent -- has come from the largest 25 banks in the country.

Again, this is good news, for this pickup had to come if any increase in the housing sector was going to take place. We can only hope that this type of lending will continue to rise.

The one really weak spot in bank lending has come in the area of commercial real estate. As I have written in many posts, the commercial real estate industry is still facing massive problems, and there are still many refinancings that need to take place over the next six to 12 months. This is an area we still have to keep our eye on.

Over the past 13-week period, commercial real estate loans on the books of commercial banks are down by $4 billion. And the decline is across the board in terms of bank size.

Consumer loans are remaining roughly constant. The interesting thing here is that, over the past quarter or so, consumer lending at commercial banks has not done anything to support the evidence that consumer spending remains relatively weak.

Overall, the commercial banking sector seems to be recovering some of its willingness to take on the risk of further lending in the area of business loans and mortgages. This is good news, indeed.

Whether or not this will persist is, of course, vital to a continuation of the economic recovery. The economy has been growing at a very modest pace -- somewhere around 2 percent -- year-over-year. This has been achieved with commercial banks basically sitting on their hands.

Given some other, not-so-good economic information, the pickup in lending from the commercial banks is a hopeful sign.

In other news, the behavior of foreign-related financial institutions is sending positive signals about the situation in Europe. Over the past two years or so, funds have flown out of the offices of foreign-related banks to provide liquidity for the crisis that was taking place in Europe.

As confidence seemed to be drained from the eurozone, foreign-related institutions in the United States transferred funds to their foreign offices. Net deposits due to foreign offices of these foreign-related banks rose to a peak total of around $260 billion -- a rise of over $650 billion from the amount of net deposits held at these banks 18 months ago.

Over the past four weeks, as the financial crisis in Europe has seemed to ease for the time being, these net deposits dropped off by about $90 billion. The crisis is not over yet, but the behavior of the banks seem to indicate some easing of the pressure that is being felt on the continent.

To finance this flow of funds, these foreign-related institutions increased their cash assets from a low of about $340 billion 18 months ago to near $850 billion earlier this year.

In the past four weeks, these foreign-related institutions have reduced their cash asset balances by about $250 billion to coincide with the decline in the net balances due to foreign offices.

To summarize, the American financial system has been a big help to the financial institutions in Europe. One can trace relatively closely how cash flows into foreign-related financial institutions have been matched by flows of funds into the foreign offices of these organizations when the crisis in Europe became more tense. The flows moved the other way as confidence in the events in Europe increased.

These flows have been an interesting indicator of the confidence these banks had in the European financial situation.

Overall, the most recent data from the American banking system tends to be on the positive side. There are still problem areas, most notably the commercial real estate sector, but on other fronts, the lending figures are encouraging. We are not out of the woods yet, but we are moving in the right direction.

There is no telling what the Federal Reserve's new round of quantitative easing will produce from the banking system. Hopefully, if the banking system continues to increase its loans outstanding and the economy starts to pick up a little more steam from this lending, the Federal Reserve will not have to go far into its QE3 bag. In my mind, this would be a real blessing.

For now, let's hope that the banks continue to expand their lending, and that the increased lending will spur the economy to better days.

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.