Loans At Largest Banks Continue To Increase

by: John M. Mason

Consistent with previous Federal Reserve releases, loans at the largest twenty-five banks in the country continue to increase fairly rapidly. This is not true of loans at the other 6200 domestically chartered banks in the banking system.

The largest domestically chartered banks in the United States increased business loans over the past thirteen week period by more than $22 billion. Most of this increase came in the last five-week period when these commercial and industrial (C&I) loans rose by more than $17 billion.

Year-over-year, C&I loans at the largest banks rose by almost 15 percent.

This would seem to indicate that economic activity is picking up. The information that we don't have is how the borrowers used the funds they borrowed. There is still indication that these loans are not going into productive uses or to hire more workers. Some evidence exists that these funds are being used to retire other, more expensive debt, to buy back the company's own stock, and to prepare for acquisitions.

This is something we need to continue to watch. The good news is that these banks are lending more aggressively.

The more interesting piece of information is that the data show that the largest twenty-five banks have stepped up their lending on residential mortgages.

Over the past thirteen week period, the residential loans on the books of these large banks rose by the same amount as did their holding of C&I loans: they rose by more than $22 billion. This is consistent with the information I reported last week (see post of November 7 and November 8) about the creation and packaging of the mortgages by the biggest banks, like Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM).

Over the past thirteen week period, residential mortgages in the rest of the banking system declined by almost $5 billion, with most of the decline coming in the past month.

For a change there was not too much change in the area of commercial real estate loans. These loans have been declining in recent periods particularly at the smaller banks, but this last thirteen-week period saw commercial real estate loans actually rise a bit.

The banking data on total loans was impacted by the impacts of Hurricane Sandy for several major brokers of federal funds were closed for business on October 30. As a consequence of the disruption, federal funds at the largest twenty-five commercial banks in the country shot up by about $60 billion during the banking week ending October 31.

On another note, a sign of the reduced financial pressures in Europe is noted in the data from the foreign-related institutions. Over the past thirteen-week period, cash assets at these foreign-related financial institutions dropped by almost $280 billion!

The most impacted account on the liability side of the balance sheet of these institutions was the account labeled "Net Due to Related Foreign Offices." As reported in earlier posts this is where we can pick up some information as to how these foreign-related organizations obtained funds in the United States and directed them off shore.

The totals of this account went from slightly more than a negative $400 billion in November 2010, meaning that these financial institutions were bringing funds into the United States rather than shipping them off shore, to more than a positive $300 billion April and May of 2012, a swing of more than $700 billion. Over the past thirteen week period "net balances" dropped by almost $160 billion.

These data are an indication of how much the situation in Europe has eased up…at least, for the time being.

So, the banking statistics continue to improve. The biggest twenty-five banks seem to be picking up their lending activity and this is good.

The other 6,200 banks, in aggregate, are still dragging. Obviously, there are many commercial banks in this category that are doing very well. But, given this, it just indicates that there are a large number of "smaller" commercial banks that are just not in the best of condition.

Absolute bank failures are increasing at a relatively slow pace. There have been only 47 bank failures reported by the FDIC this year. However, there were 70 fewer banks in the banking system on June 30, 2012 than existed at the end of 2011. The preferred choice of the FDIC is now to merge banks rather than to just see the "sicker" organizations fail. This is all well and good and it is the less expensive way for the FDIC to shrink the number of banks in the banking system.

Note that the largest twenty-five domestically chartered banks in the United States hold 57 percent of the banking assets of the country. Foreign-related financial institutions hold 13.5 percent of the banking assets, and this is after their total assets declined by $285 billion over the last fifteen weeks. Thus, the 6,200 "smaller" domestically chartered banks in the United States hold less than 30 percent of the banking assets in the country.

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.