Commercial Bank Lending Still Not Supporting Economic Growth

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by: John M. Mason


Commercial bank lending is expanding at only a modest pace.

Much of the bank lending is going to refinance outstanding commercial real estate loans and to support other non-productive activities.

Most Federal Reserve cash injections just going into "financial circuit" helping economy to restructure from fifty years of credit inflation.

Economic growth in the United States remains tepid -- and commercial bank lending is doing no better.

Through February and into March, the lending growth at commercial banks is not very strong. Overall, year-over-year, loans and leases at all commercial banks rose by just 2.5 percent.

The largest twenty-five domestically chartered banks in the country only saw their lending book increase by less than one percent. Commercial and Industrial loans increased by 9.0 percent, but it seems that the lending is not going into the most productive types of loans, the ones that would spur on economic growth. It seems as if these large banks are making loans for mergers and acquisitions and the Federal Reserve is actually telling these banks to be a little careful on how much of this lending to do. Also, a lot of the business lending at large commercial banks seems to be going to hedge funds and private equity funds that are using the money for things like the purchase of real estate, although the borrowing is through lines of credit and other business loan sources and do not show up in real estate lending category.

Just a note to this; business loans at foreign-related financial institutions are up over 10.0 percent, year-over-year. This lending is certainly not going into Main Street uses that help to spur the economy along.

The other lending category of interest on the business side is lending for commercial real estate. Commercial bank lending for this purpose is up by almost 5.5 percent, year-over-year. The major strength in this area is coming from the "smaller" domestically chartered banks. These "smaller" banks have experienced an increase, year-over-year, of about 6.5 percent.

In earlier blogposts, I have discussed how this lending is progressing and have commented that there is a good side to this increase and a not-so-good side. The good side is that this lending is providing a floor for the commercial real estate market in that borrowers are getting support for the market as the banks are rolling-over a large portion of the debt that has existed in this area. Thus, the commercial real estate market, a market that many have been very concerned about over the past four years or so, has gotten a reprieve.

The not-so-good side of the situation is that a lot of these loans that have been refinanced were projects that were marginal earlier in the recovery and were not only rolled-over but the loans were increased to help keep the projects going and cover the further costs of the projects and to pay for some interest costs. This, from what I can see, is the reason for the rising numbers of loans outstanding. The rise in loan volume is not because of an increase in new projects being started.

As far as residential mortgage lending, the largest twenty-five domestically chartered banks in the country continue to reduce the amount of residential mortgages on their books. Residential mortgage lending at these large banks is down by over 6.0 percent in the past year. Residential mortgages are up at the "smaller" banks by about 2.5 percent, year-over-year.

Asset growth is up at all commercial banks, but the primary reason for this increase is that the banks are still increasing their cash assets. Cash assets held by the largest twenty-five domestically chartered banks are up by almost $400 billion! This number is exceeded by foreign-related financial institutions, which added over $425 billion in cash assets to their balance sheets over the past year.

In summary, most of the money being pumped into the banking system by the Federal Reserve is not going into uses that support economic growth. I would argue that large amounts of these funds are going to support lending that is just financial in nature and not "productive" in the sense that it increases economic output and puts people back to work again. Instead, the funds are going to support corporate acquisitions or to allow hedge funds and others to purchase the existing housing stock or to allow owners and builders of commercial real estate to refinance their unfinished projects.

This is why I have argued in many of my posts that the money being injected into the banking system by the Federal Reserve is just staying in the financial circuit and is not going into the "real" circuit.

Whereas this outcome may not contribute to further economic growth at this time, it may be necessary to support the economy and help the economy to restructure the dislocations that resulted from fifty years of credit inflation. In other words, the United States economy is heading in the right direction, just don't expect an exuberant expansion of the economy in the next few years.

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.