Sunday, May 10, 2009

When Will the Banks Start Lending Again?

The Federal Reserve, as we know, has been pumping all kinds of reserves into the banking system. For the banking week ended May 2, 2009, Federal Reserve Bank Credit stood at $2.041 trillion. This is up from $0.894 trillion for the banking week ending September 3, 2008, an increase of $1.147 trillion.

Total reserves in the banking system jumped from $44.1 billion in the month of August 2008 to $881.8 billion in the month of April 2009. This is an increase in total reserves in the banking system of $837.7 billion.

Note that the difference between the amount of credit the Federal Reserve extended to the economy and the increase in total reserves in the banking system is $309 billion, the amount of Federal Reserve credit that ended up in coin and currency outside the banking system.

This massive growth in total bank reserves can be picked up in the year-over-year growth in total reserves as represented in the accompanying chart. Note that the year-over-year rate of growth in total reserve for April 2009 is 1,924%.

The crucial point I want to make here, however, is that in the banking week ending September 3, 2008, Federal Reserve credit stood at $894 billion. The increase in total reserves at ALL commercial banks from August 2008 through April 2009 was $838 billion. In eight months the Federal Reserve added just about the same amount of dollars to commercial bank balance sheets that it had accumulated on its own balance sheet in the 94 years beginning in 1913!

And, what did the commercial banks do with the funds the Federal Reserve forced into the banking system. It sat on them. In the next chart we get a picture of the excess reserves of all commercial banks in the United States. We see the commercial banks are holding $824 billion in excess reserves. That is, in August 2008, the commercial banking system held between $1.0 and $2.0 billion in excess reserves. So, almost all of the increase in total reserves in ALL of the commercial banking system between the first of September 2008 and the end of April 2009 went into excess reserves! There was next to no lending going on in the whole banking system.

What happened to loan growth in the United States banking system? Well, in the fall of 2008 the year-over-year rate of growth in the loans and investments held on the balance sheets of all commercial banks was over 10%. In April 2009, the year-over-year rate of growth in loans and investments held on the balances sheets of all commercial banks was just over 2%. Loans in the commercial banking system increased by a little more than this number but, the decline in the loan series was even greater than what took place in loans AND investments.

The bottom line is that the banking system was putting out next to nothing in loans or in investments in securities. The banking system basically has sat on the reserves that the Federal Reserve has pumped into the economy.
There is only one conclusion that I can draw from the analysis of these data. Commercial banks are so petrified at their condition that they are not putting any money out into the business or financial community!

I don’t care what the stress tests show. Behavior speaks louder than stress tests! Commercial banks aren’t lending because they can’t take the risk that they will put any more bad loans onto their books. At least cash holds its nominal value and is not subject to default risk!

When will banks begin to lend again?

Unfortunately, I don’t like any of the answers I come up with that would account for them lending more in the near term.

1 comment:

Three Guys and a Girl said...

I am a CFO with a mid size company and I can attest first hand to what you are saying. The banks are either unwilling to take risk or are charging 2 to 3 times the typical interest rate spread...