Monday, February 04, 2008

Commercial Loan Growth Shows Ongoing Strength

A few weeks ago, I posted about commercial bank loans being at a record high of $760 billion in early January, based on weekly Federal Reserve banking data for large commercial banks. The updated chart above (click to enlarge) reflects a few more weeks of banking data, and this time shows the percent change from a year ago. Not only is commercial lending at an all-time high based on volume, but also the year-to-year growth rate has been phenomenal: double-digit growth in commercial bank loans for almost 6 months now, and close to 20% growth for the last 4 months, stronger growth in commercial lending than at any time in at least 20 years.

Listening to media reports on the U.S. banking system and credit markets, one gets the idea that commercial lending and credit have dried up, and thousands of banks and companies are teetering on the edge of insolvency (e.g., see Paul Krugman's blog post "Credit Crunch"). Yet the reality is that commercial lending is at an all-time historical high, and growing at the fastest rate in recent history.

This suggests that thousands of companies are applying for, and being granted, commercial loans to finance business investment and expansion. And the growth in commercial lending is stronger than ever before. Not exactly an ingredient for a recession. Notice on the graph above the significant declines in commercial lending that accompanied the recessions in 1990-1991 and 2001 - it would be difficult to suggest that we have entered a recession in January 2008 with such strong growth in commercial lending.


At 2/04/2008 8:00 PM, Anonymous Anonymous said...

The January 2008 Senior Loan Officer Opinion Survey

Large majorities of domestic and foreign institutions that reported having tightened lending standards and terms on C&I loans over the past three months pointed to a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for their more-restrictive lending policies. Smaller but significant fractions of domestic and foreign respondents noted that a deterioration of their banks’ current or expected capital or liquidity positions had contributed to the tightening of lending standards and terms over the past three months.

About 80 percent of domestic banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase from the October survey. The net fraction of domestic banks reporting tighter lending standards on these loans was the highest since this question was introduced in 1990. About 55 percent of foreign banks—up from about 40 percent in the October survey—indicated that they had tightened their lending standards on such loans. Concerning loan demand, about 45 percent of both domestic and foreign respondents, on net, reported weaker demand for commercial real estate loans over the past three months.

A set of special questions asked banks about their expectations for delinquencies and charge-offs on loans to businesses and households in 2008 under the assumption that economic activity progresses in line with consensus forecasts. On balance, the responses indicate that large majorities of domestic and foreign banks expect a deterioration in loan quality in 2008. Regarding loans to businesses, between about 75 percent and 85 percent of domestic and foreign banks expect a deterioration in the quality of their C&I and commercial real estate loan portfolios. About 15 percent of domestic and 20 percent of foreign respondents expect a substantial deterioration in the quality of their commercial real estate portfolios. Concerning residential real estate loans, between about 70 percent and 80 percent of domestic respondents expect the quality of their prime, nontraditional, and subprime residential mortgage loans, as well as of their revolving home equity loans, to deteriorate in 2008. Finally, about 70 percent of domestic respondents expect a deterioration in the quality of both credit card and other consumer loans.

At 2/04/2008 8:04 PM, Anonymous Anonymous said...

There seems to be a disconnect between this data and the Fed's Senior Loan Officer Survey. A blogger blogs and Krugman charts the credit crunch.

At 2/04/2008 8:25 PM, Anonymous Anonymous said...

Wall Street's biggest mortgage investors and bankers aren't betting on a recovery in U.S. credit markets any time soon.

Instead, they're searching for ways to restore investor confidence in the so-called securitization market, which has emerged as the epicenter of the U.S. subprime mortgage crisis, while bracing for further hits in commercial mortgages and credit-cards, according to experts gathered on Monday at the American Securitization Forum's (ASF) meeting in Las Vegas.

Roughly 50 percent of ASF professionals recently polled by the group -- whose members helped fuel the U.S. housing-finance industry's boom and bust -- don't believe that current credit market troubles will dissipate in 2008.


At 2/04/2008 8:28 PM, Anonymous Anonymous said...

Looking at the original post's reference chart over at the St. Louis Fed...just look at "Percent Change" and it appears very similar to the early days of other recessions.

At 2/04/2008 9:50 PM, Anonymous Anonymous said...

Anon. 8:00,

Is a survey the same as actual data or does it measure sentiment? Aren't opinions of what may or may not happen subjective speculations however well-informed? Is this another exercise in tea leaf reading?

By contrast, MJ Perry's presents tangible data which supports his conclusion. Even if one does not agree with the supposition, it is a sound argument.

At 2/04/2008 10:22 PM, Anonymous Anonymous said...

Could this be a function of the complete shutdown of the Commercial Paper Market? Forcing those who normally go to the CP market to go the CI Loan route, instead?

Kudlow, tonight, had a chart that showed that once you factor in the dearth of commercial paper issued, you get down to about two point six, or thereabouts.

At 2/05/2008 2:30 AM, Anonymous Anonymous said...

I think that rufus has solved the conundrum. The asset backed commercial paper (CP) market froze up last summer and the bankers were compelled to lend on the illiquid instrument guarantees driving up lending rates to 20% year over year. Now that the CP market is recovering, there is less need for the bankers to lend on their guarantees and the loan rate growth is flattening out. Loan volume is flat so far in 2008.

At 2/05/2008 2:32 PM, Anonymous Anonymous said...

you need to normalize this by looking at it as a percent of nominal gdp or personal income or nominal business sales.

loans at roughly the same level as they were seven years ago is not an aggressive or easy number.

At 2/05/2008 6:33 PM, Anonymous Anonymous said...

The current "recession" is more like a correction. It makes for good headlines but there isn't much substance to it, in my opinion. See more on my blog about this here and here.

At 7/11/2008 3:08 AM, Anonymous Anonymous said...

This suggests that thousands of companies are applying for, and being granted, commercial loans to finance business investment and expansion. And the growth in commercial lending is stronger than ever before.


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