Foreign Banks Doing Well In U.S. While Business Loans Pickup At Domestically Chartered Banks

by: John M. Mason

According to the latest Federal Reserve statistics, in December 2013 foreign-related institutions accounted for 16.5 percent of the commercial banking assets in the United States, up from 14.2 percent in December 2012.

The asset growth in these foreign-related financial institutions grew by almost 25 percent year-over-year with far out-paced the growth of the 25 largest domestically chartered banks, which came in at 3.7 percent and the rest of the domestically chartered banks, which grew at a 3.8 percent rate.

An interesting aspect of this growth was that the foreign-related institutions grew by just about $460 billion in assets. Cash assets at these foreign banks rose by almost $500 billion. On the other side of the balance sheet, the net amount due to related foreign offices of these institutions grew by almost $330 billion.

I have written about this activity before as an outcome of the Quantitative Easing of the Federal Reserve System. It is obvious that this behavior continued throughout 2013 although it seemed to top out in the last month of the year.

The account Net Due to Related Foreign Offices was negative before the Fed's quantitative easing began and picked up steam as it continued. The only obvious conclusion one can draw from this is that a goodly portion of the funds the Fed pumped into the banking system went "off-shore." We will see if this flow reverses itself as the Fed reduces its monthly purchases of bonds in the open market.

How did the Fed's monetary injection impact US domestically chartered banks in 2013?

The cash assets of the 25 largest domestically chartered banks rose by about $355 billion during the last year. The rest of the domestically chartered banks experienced an increase of only $25 billion.

The Fed's liquidity injection of the past year, therefore, went first to foreign-related institutions, about 56 percent, the largest 25 commercial banks, about 41 percent, while the rest of the banking system ended up with only about 3 percent.

So much for helping the smaller commercial banks get through this exercise!

The major shifts in loan portfolio activity came in real estate loans. Home equity loans and residential mortgages at US domestically chartered banks fell by $93 billion during the year. About $90 billion of this decline came at the 25 largest banks.

Commercial lending at the largest banks rose by over $110 billion, representing a 7.5 percent increase during the year. Commercial lending at the smaller banks rose by just under $60 billion representing roughly a 7.0 percent increase.

The question that keeps coming to my mind, given the pickup in the housing market is just who is getting the financing for these home purchases and how will this play out in the future.

I have written several posts about how Blackstone and other hedge funds…including Berkshire Hathaway…and quite a few real estate development firms…and quite a few wealthy individuals…are picking up lots and lots of houses…to rent…at least, for the time being.

My issue is this…if large amounts of home purchases are being made by Blackstone and other representatives of high net worth people, the loans to finance these purchases will not be showing up in residential real estate loans. They borrowing done to support these purchases will be showing up as business loans.

If that is the case, then a substantial part of the pickup in the commercial and industrial loans, particularly at the largest of the 25 domestically chartered banks in the country, would be going to finance these real estate acquisitions. Hence, business loans are rising and residential real estate loans are declining.

And, we have seen that Blackstone has created a whole new brand of bond, one that pays its interest and principal payments from the rents that it is collecting on the properties it owns. These bond issues…at very low rates…would go to pay off the business loans that Blackstone has obtained from the commercial banks.

Supporting the fact that Blackstone got "business loans" to purchase the properties is the fact that Blackstone would not be issuing bonds to pay off these loans if it had obtained the funds to purchase the properties from some kind of real estate loan.

We will have to continue to watch these loan categories as the economic "recovery" continues.

Commercial real estate loans increased by 4.5 percent in the United States, year-over-year. I have written about this increase in previous posts. This is not a real robust increase, and, the fact is, is that of the $63.3 billion total increase in commercial real estate loans in 2013, almost 80 percent of the increase, or, $50 billion came domestically chartered banks smaller than the largest 25 domestically chartered banks in the country.

I have written before that I believe this increase is something that we should also watch. I do not think that the commercial real estate market is beginning to take off and that this is the reason for the increase in loans to this sector.

My take on this is that the "smaller" commercial banks in the country have a problem area in commercial real estate loans. Given all the liquidity pumped into the banking system and the fact that the economic recovery is in its fifth year, these "smaller" commercial banks have re-written a lot of these loans, adding to the balance outstanding as the loan terms were negotiated.

These commercial real estate loans had five- to seven-year maturities and it was always a question of what would happen to these loans once they matured. These loans were not classified as "bad" loans by the regulators because they were "current". But, since they were single-payment loans, there was always the question of how they would work out.

Well, I am arguing that the loans are being "worked out". They are being renewed with larger balances to carry the real estate manager through the hard times. If the economy continues to recover and if the commercial properties rise in value, then the banks will be fine and the world can go on.

The problem is that we are not "out of the woods" yet. This is an area that needs continual watching.

This is my summary analysis of how the commercial banking system of the United States made it through 2013 and some of the things to keep an eye on in 2014.

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.