Some Positive Movement in Small Bank Lending?

Could there be a glimmer of life in bank loans at Small Domestically Chartered Commercial Banks?

The latest figures released by the Federal Reserve on the Assets and Liabilities of Commercial Banks in the United States gives some indication that this is happening.
In the latest four weeks for which we have data, all Loans and Leases at commercial banks declined by $22 billion, but loans and leases at the smaller banks actually rose by $50 billion. And, this rise was across the board.

Note that over the last 13-week period, all loans and leases fell by $29 billion so that lending is down for the last quarter’s worth of data we have, but the figures reported above represent a movement in the right direction.

Furthermore, the increase in lending was across the board: commercial and industrial loans at these small banks rose by about $19 billion; real estate loans rose by $18 billion; and consumer loans increased by almost $17 billion. All these figures are down for the last 13-week period except for consumer loans that show an increase of about $14 billion for this longer period.

Are we getting a break in the ice barrier at the smaller banks? We’ll just have to wait and see.

Just an interesting side note on this: cash assets held by these same smaller banks actually declined by $17 billion during the last four weeks.

This occurred as the commercial banking system became even more awash with cash during this time period. Cash assets at Large Domestically Chartered banks rose by $88 billion and cash assets held by Foreign-Related Institutions rose by $192 billion. Total cash assets reported in the banking system reached a new high in the weeks of October 21 and October 28 of about $1.3 trillion while Reserve Balances with Federal Reserve Banks rose to $1.08 trillion on this last date and excess reserves averaged $1.06 trillion, a new record, for the two weeks ending November 4.

While the smaller commercial banks were increasing their loan portfolios during the last four weeks, large banks and foreign-related institutions were reducing theirs. For example, in the last four week period, large commercial banks reduced total loans by almost $52 billion. For the last 13-week period these banks have reduced all loans by $139 billion. And the decreases were all over the balance sheet: commercial and industrial loans were down by $27 billion; real estate loans were down by $40 billion; and consumer loans were down by $10 billion.

The only offsetting item on the balance sheets of the larger banks was an increase in securities held. This item rose $29 billion in the latest 4-week period; and was up by $68 billion over the last 13 weeks. This may be related to the fact that the largest reported area for earnings in the larger banks over the last calendar quarter or so came in the area of securities trading.

The securities portfolios of the smaller banks and the foreign-related institutions declined, both for the 4-week period and the 13-week period.

Overall, total assets in the banking system rose by $184 billion in the latest 4-week period, but that can be accounted for by the increase in cash assets. Total bank lending did not increase, and commercial and industrial loans and real estate loans continued to decline.

In this period, when everyone is looking for signs of a recovery, the fact that the lending at smaller commercial banks has shown some positive growth is encouraging. We will have to keep an eye on this area of the economy. Obviously, the lending at the smaller banks needs to pick up if the economy of “Main Street” is going to get started.

Furthermore, there has been great concern over possible solvency problems among the smaller banks. If these smaller banks are beginning to lend again and if they are drawing down their cash balances to do that lending, then that could indicate some increasing confidence within this sector that asset balances are beginning to stabilize. This would really be good news!

I don’t want to be premature on this, but, the increased lending of the smaller banks is a surprise and, possibly, a hopeful sign.

Yet, there are the larger banks. There is no indication that the decline in lending at the larger banks is going to stop. And, in one sense, why should it. Many of the larger banks are making lots of money off of security trading. The ones that are not in as good a shape continue to “down size” and contemplate which assets they want to sell off or which asset they can sell off. Apparently, continuing to stockpile cash assets and excess reserves is a good strategy for them. This, to me, is continuing evidence that the problem in these banks is one of solvency because the value of their assets cannot be determined.

The best news is still that things on the banking front are relatively quiet. Again, this is a sign that the banks are working through their problems. Yes, there is a bankruptcy here and a bank closing there. This news will not stop for another 12 to 18 months. Let’s just hope that things continue to stay quiet and these events proceed peacefully.