Friday, Jan. 08, 2010
Bank Lending Is Still Down. Should We Be
By STEPHEN GANDEL
Move over, commercial lending and home foreclosures. The falling number of bank loans is emerging as the No. 1 economic concern of 2010. But while many expect the credit crunch to continue, the problem of bank loans might not be as bad as many people think.
“If the economic indicators were not recovering, then bank lending would be prime culprit,” says top Wall Street strategist Edward Yardeni. “The weak borrowing market just doesn’t seem to be stopping the economic turnaround.”
Nonetheless, many policymakers and analysts are worried. In late December, President Obama summoned the heads of the nation’s largest banks to the White House to urge them to make more loans to small and medium-sized businesses. Federal Reserve Chairman Ben Bernanke, too, has mentioned in recent speeches the continued credit crunch as an economic concern. (See how Americans are spending now.)
Indeed, the numbers are eye-catching. As of Dec. 23, which is the latest date for available data from the Federal Reserve, bank lending at nearly $6.7 trillion was down $100 billion from the month before. In the past year, the volume of loans outstanding by banks in the U.S. has fallen just over $500 billion. Bank loans have been trending down for a while. Worse, most analysts don’t see bank lending turning around anytime soon. Paul Miller of FBR Capital says a combination of banks wanting to take fewer risks and lower demand for credit from consumers and businesses will cause banks to continue to make fewer loans this year than last.
“Available credit for the U.S. is receding and that’s the economy’s real lifeblood,” says Christopher Whalen of research firm Institutional Risk Analytics. “This is a disaster.”
But while bank loans are falling, the well of credit for corporations is far from dry. In fact, the 22 largest banks in the Treasury’s Troubled Asset Relief Program issued or renewed $127 billion in business loans in November, roughly the same as five months ago. And at a recent $6.7 trillion, bank lending is at the same level it was in the end of 2007, when the economy was still expanding. That would be a problem if we had serious inflation. When asset prices rise and loan values don’t, that can signal economic stagnation. But at a time when many asset prices are falling, it makes sense that loan volumes would be falling as well. After all, the collateral is worth less. (See pictures of TIME’s Wall Street covers.)
What’s more, unlike during the height of the credit crunch, corporations are able to raise money from investors. On Tuesday alone, corporations sold $23.5 billion in bonds, which was the second most active day in debt sales by companies on record. In 2009, corporations issued $712 billion in investment-grade bonds, up from $646 billion in 2008.
Bank analyst John McDonald of Wall Street firm Bernstein Research says most people are focused on how the lack of loans will hurt bank earnings. Lending is after all how banks make money. But in the past year or so banks have had to sock more and more cash away into their reserves to account for their growing bad loans. That’s caused earnings to plummet. With loans falling, reserve ratios — the measure of reserves to loans — are growing. That means banks will be able to divert less of their operation profits into those rainy-day accounts, which should boost bottom lines.
Finally, unlike the stock market or consumer confidence, bank lending is a lagging indicator. Businesses look for loans to expand once the economy is growing and orders are coming in again. And banks, since they get hurt so badly in recessions, particularly this one, become very risk-adverse at the beginning of economic cycles. “In the initial stages of a recovery banks are never handing out cash,” says Lakshman Achuthan, who is a managing director at Economic Cycle Research Institute. “It never happens that way, and we have had plenty of recoveries.”