Last month I wrote a post about “Why is most of the Fed’s QE2 Cash Going to Foreign Related Banking Institutions.” ( http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions)
This month the Fed’s “cash” injection has ended up at the largest 25 banking institutions in the United States. Cash assets at the largest domestically chartered banks rose by almost $160 billion over the past four weeks.
The cash assets at foreign-related banking institutions dropped modestly (about $4 billion) over the last four weeks but is still up approximately $125 billion since the end of last year.
According to the Fed’s data on the commercial banking industry, cash assets in commercial banks have risen by about $260 billion over the past nine banking weeks, with around $135 billion going to the largest 25 domestically chartered banks, $125 billion going to foreign related financial institutions and roughly zero going to the other 7,600 domestically chartered small banks.
Other than this fact, the interesting change within the United States banking system itself is that although credit extension at domestically chartered commercial banks declined rather substantially since the end of last year, the loans and leases at the smaller commercial banks actually went up.
Overall, loans and leases on the books of commercial banks declined by about $27 billion over the last four weeks and by $61 billion since the end of 2010.
Interestingly, the smaller banks recorded a $28 billion increase in loans over the last four weeks, with commercial and industrial (C&I) loans rising by $5.5 billion and commercial real estate loans increasing by about $18 billion.
It should be noted that residential mortgages fell by about $11 billion over the same time frame.
Is this a sign that commercial lending is picking up for the smaller banks. This is the first time in the last few years that commercial lending has actually shown any sign of increasing at these smaller institutions, especially in the area of commercial real estate.
C & I loans did pick up at the larger banks over the last four weeks and this dominated the activity in this area during the early part of this year.
However, commercial real estate lending declined at the largest banks by $25 billion, so that this category of loans did decline in total. Also, since the end of last year, commercial real estate loans at these large banks declined by $32 billion so that overall, the commercial real estate sector continued to decline throughout the early part of 2011.
So, the question is, “Is bank lending to businesses starting to pick up a little?”
Really, we only have a little information that it might be picking up. But, it certainly is something to keep our eyes on.
The big mystery still seems to be the placement of the QE2 money being generated by the Federal Reserve system. Reserve balances at Federal Reserve banks have increased by about $280 billion from the end of 2010 to March 2, 2011. This increase in Reserve Balances seems to be roughly divided between the largest 25 domestically chartered commercial banks and foreign-related financial institutions. But, loan at these institutions over this time period have actually gone down. What’s going on?
As for the smaller banks, they do not seem to have participated in this round of quantitative easing. Yet, it has been my belief that one rationale for QE2 has been to provide market liquidity for the smaller banks so that it will ease the strain on those banks that are especially having solvency problems. Given recent data released by the FDIC it seems as if there are still a large number of the smaller banks in the country that are still having major problems staying alive.
Thus, at least part of the purpose of QE2 is to help keep these banks open so that they can be closed by the FDIC in an orderly fashion. Through the first nine weeks of the year the FDIC has closed an average of just under 3 banks per week. This is down slightly from about 3.5 banks a week in 2010.
We continue to wait. Believe it or not, the economic recovery is just about a quarter short of being two years old. There are still areas of the economy that remain of concern like the banking industry, the residential housing market, the commercial real estate market, and state and local finances. And, there still are shocks around the world that threaten to bring everything else down: the unrest in the Middle East and arising oil prices; the earthquake in Japan; and the sovereign debt problem in Europe.
So the bad news is that the economic recovery is just about a quarter short of being two years old and underemployment is so large and manufacturing capacity is so low for this time in the business cycle.
The good news is that the economic recovery is just about a quarter short of being two years old
and the recovery seems to be robust enough to continue to meander along in an upward direction.
It would be nice to have more bank lending to spur the recovery along, but it will be even better if the financial system can continue to function without a disruption to the steady pace of the FDIC closing the banks it needs to close.
Showing posts with label commercial loans. Show all posts
Showing posts with label commercial loans. Show all posts
Sunday, March 13, 2011
Sunday, October 11, 2009
The Small Banks Are Not Doing Well
This is my monthly report on bank lending. Last month I reported on the continued absence of the commercial banking industry in loan markets. (See my post of September 10, 2009, “Bank Lending Stays on the Sidelines”: http://seekingalpha.com/article/160890-bank-lending-stays-on-the-sidelines.) Bank lending was still absent during the most recent month, but there now seems to be a significant shift in the commercial banking industry: greater changes seem to be taking place in the smaller banks than we have seen during the current economic crisis.
This deterioration in the industry figures coincides with the increasing number of failures that are registering with the Federal Deposit Insurance Corp. (FDIC). This problem made the front page of the New York Times on Sunday: see “Failures of Small Banks Grow, Straining F. D. I. C.”, http://www.nytimes.com/2009/10/11/business/economy/11banks.html?ref=business. And, with more than 400 banks, almost all of them small ones, on the FDICs list of problem banks, we can expect the number of failures to grow and the bank lending figures to continue to shrink.
Total assets at commercial banks declined by $320 billion over the latest 13-week period according to the Federal Reserve. Of this total, the decline in assets over the last 5-week period was $250 billion indicating that the slide at commercial banks is not receding. Although the absolute decline in both periods of time was greater for the large banks, the percentage change was greater for the smaller banks.
What is most interesting is that the absolute decline in bank loans and leases in both periods was roughly the same for the large banks and the small banks. The decline in loans and leases over the 13-week period was $112 billion for large banks: $97 billion for small banks. However, for the last 5-week period the decline in this figure for small banks was $69 billion and $66 billion for large banks.
Commercial and Industrial loans, business loans, continued to drop at a rapid pace over the 13-week time span ($108 billion) as well as in the 5-week period ($50 billion). Relatively speaking the declines were equally divided between the large banks and the smaller banks.
The big difference between the different size banks comes in the area of real estate loans. Overall, real estate loans dropped by $113 billion over the last quarter, $48 billion over the last 5 weeks. But the decline in small banks was $68 billion for the last quarter and $38 billion over the last 5 weeks. The figures for large banks were $41 billion and $6.3 billion, respectively.
Here we find the startling difference: the small banks experienced most of the drop in real estate loans in commercial real estate loans. The drop in commercial real estate loans at small commercial banks was $36 billion for the full 13 weeks, but most of the decline came in the last 5-week period as these loans dropped by $24 billion during this latter time.
We have been hearing for months that there was going to be a problem in commercial real estate lending and that this problem was going to be centered in regional and local commercial banks. It looks as if this problem is finally hitting the banking system and is showing up in the numbers. This is an area that we are going to have to continue to watch for the economic difficulties in commercial real estate could continue to paralyze the smaller commercial banks for quite some time going forward. And, with the large number of problem banks identified by the FDIC being smaller institutions, we could see a rapid increase in the number of these institutions going under.
It should be noted that commercial real estate loans at large commercial banks actually increased over the past 13-week period and roughly held constant for the last five.
Another sign that these difficulties are piling up at the smaller commercial banks is the accumulation of cash assets at the smaller institutions and the timing of this build up. Cash assets at small commercial banks rose by $54 billion over the past 13 weeks. These assets increased by $48 billion over the last 5 weeks. That is, most of the increase in cash assets came at the time that time that the commercial real estate portfolio at these banks were declining the most.
The implication of this behavior is that the smaller banks are really starting to suffer and this is leading them to take a more-and-more conservative position in their balance sheets.
It should be noted that large commercial banks actually reduced their holdings of cash assets during this period. The decline over the 13-week period was about $5 billion, while over the last 5 weeks the decline was a whopping $70 billion. So, large banks build up their cash position over the first 8 weeks of the period and then reduced this position substantially over the last five.
The basic conclusion that can be drawn from this analysis is that the balance sheets of the commercial banking sector continue to shrink and with this shrinkage we see very little new borrowing taking place.
The big story this month is that the smaller banks in the country are really being hit with problems relating to bad assets. As a consequence, their balance sheets are suffering much more than their bigger counterparts and this is especially true when it comes to commercial real estate. Not only are the smaller banks reducing their exposure to commercial real estate loans, it appears as if this retraction from the lending markets is connected with an overall move by these banks to much more conservative lending practices.
Such a move would certainly not contribute to economic recovery, especially on Main Street. It is true that the larger banks are also contracting their balance sheets now, but they will tend to be the first ones to get back into lending when the time is right.
However, if the smaller banks change their “risk preferences” and become more “risk averse” during this period of restructuring it is highly unlikely that we will see them return anytime soon to contribute to an economic recovery in their geographic area. Since these organizations do not have the same access to resources as their larger counterparts, they will probably stay very conservative for an extended period of time.
Just one thing more. Last week Excess Reserves in the banking system reached an all-time high. For the two week period ending October 10, Excess Reserves averaged $918 billion! This, of course, is being allowed to happen by the Federal Reserve System as reserve balances at the Federal Reserve got close to the astronomical figure of $1.0 trillion! This figure only averaged $960 billion in the banking week ending October 7, but daily figures over the past two weeks did reach levels substantially higher.
The banking system is weak. It remains weak. Maybe some of the larger banks, the ones that got bailed out, are doing OK. This does not seem to be the case for the smaller banks. The FDIC knows this. The Federal Reserve knows this. It is not a comfortable situation!
This deterioration in the industry figures coincides with the increasing number of failures that are registering with the Federal Deposit Insurance Corp. (FDIC). This problem made the front page of the New York Times on Sunday: see “Failures of Small Banks Grow, Straining F. D. I. C.”, http://www.nytimes.com/2009/10/11/business/economy/11banks.html?ref=business. And, with more than 400 banks, almost all of them small ones, on the FDICs list of problem banks, we can expect the number of failures to grow and the bank lending figures to continue to shrink.
Total assets at commercial banks declined by $320 billion over the latest 13-week period according to the Federal Reserve. Of this total, the decline in assets over the last 5-week period was $250 billion indicating that the slide at commercial banks is not receding. Although the absolute decline in both periods of time was greater for the large banks, the percentage change was greater for the smaller banks.
What is most interesting is that the absolute decline in bank loans and leases in both periods was roughly the same for the large banks and the small banks. The decline in loans and leases over the 13-week period was $112 billion for large banks: $97 billion for small banks. However, for the last 5-week period the decline in this figure for small banks was $69 billion and $66 billion for large banks.
Commercial and Industrial loans, business loans, continued to drop at a rapid pace over the 13-week time span ($108 billion) as well as in the 5-week period ($50 billion). Relatively speaking the declines were equally divided between the large banks and the smaller banks.
The big difference between the different size banks comes in the area of real estate loans. Overall, real estate loans dropped by $113 billion over the last quarter, $48 billion over the last 5 weeks. But the decline in small banks was $68 billion for the last quarter and $38 billion over the last 5 weeks. The figures for large banks were $41 billion and $6.3 billion, respectively.
Here we find the startling difference: the small banks experienced most of the drop in real estate loans in commercial real estate loans. The drop in commercial real estate loans at small commercial banks was $36 billion for the full 13 weeks, but most of the decline came in the last 5-week period as these loans dropped by $24 billion during this latter time.
We have been hearing for months that there was going to be a problem in commercial real estate lending and that this problem was going to be centered in regional and local commercial banks. It looks as if this problem is finally hitting the banking system and is showing up in the numbers. This is an area that we are going to have to continue to watch for the economic difficulties in commercial real estate could continue to paralyze the smaller commercial banks for quite some time going forward. And, with the large number of problem banks identified by the FDIC being smaller institutions, we could see a rapid increase in the number of these institutions going under.
It should be noted that commercial real estate loans at large commercial banks actually increased over the past 13-week period and roughly held constant for the last five.
Another sign that these difficulties are piling up at the smaller commercial banks is the accumulation of cash assets at the smaller institutions and the timing of this build up. Cash assets at small commercial banks rose by $54 billion over the past 13 weeks. These assets increased by $48 billion over the last 5 weeks. That is, most of the increase in cash assets came at the time that time that the commercial real estate portfolio at these banks were declining the most.
The implication of this behavior is that the smaller banks are really starting to suffer and this is leading them to take a more-and-more conservative position in their balance sheets.
It should be noted that large commercial banks actually reduced their holdings of cash assets during this period. The decline over the 13-week period was about $5 billion, while over the last 5 weeks the decline was a whopping $70 billion. So, large banks build up their cash position over the first 8 weeks of the period and then reduced this position substantially over the last five.
The basic conclusion that can be drawn from this analysis is that the balance sheets of the commercial banking sector continue to shrink and with this shrinkage we see very little new borrowing taking place.
The big story this month is that the smaller banks in the country are really being hit with problems relating to bad assets. As a consequence, their balance sheets are suffering much more than their bigger counterparts and this is especially true when it comes to commercial real estate. Not only are the smaller banks reducing their exposure to commercial real estate loans, it appears as if this retraction from the lending markets is connected with an overall move by these banks to much more conservative lending practices.
Such a move would certainly not contribute to economic recovery, especially on Main Street. It is true that the larger banks are also contracting their balance sheets now, but they will tend to be the first ones to get back into lending when the time is right.
However, if the smaller banks change their “risk preferences” and become more “risk averse” during this period of restructuring it is highly unlikely that we will see them return anytime soon to contribute to an economic recovery in their geographic area. Since these organizations do not have the same access to resources as their larger counterparts, they will probably stay very conservative for an extended period of time.
Just one thing more. Last week Excess Reserves in the banking system reached an all-time high. For the two week period ending October 10, Excess Reserves averaged $918 billion! This, of course, is being allowed to happen by the Federal Reserve System as reserve balances at the Federal Reserve got close to the astronomical figure of $1.0 trillion! This figure only averaged $960 billion in the banking week ending October 7, but daily figures over the past two weeks did reach levels substantially higher.
The banking system is weak. It remains weak. Maybe some of the larger banks, the ones that got bailed out, are doing OK. This does not seem to be the case for the smaller banks. The FDIC knows this. The Federal Reserve knows this. It is not a comfortable situation!
Thursday, September 10, 2009
Banks Remain on the Sidelines
The commercial banking system is still holding onto cash rather than lending or investing. Over the thirteen weeks ending August 26, 2009 the assets of the banking system dropped by $246 billion, but the cash assets of the banking system rose by $87 billion. In the most recent four week period bank assets did rise by $85 billion, but cash assets at the banks rose by $183 billion during the same time span.
Overall, banks, during the last 13-week period, have reduced, at a more rapid pace, their holdings of loans and investments as write-offs have increased, as there has been little incentive to make new loans, and as the banks have gotten out of securities that are not issued or guaranteed by the U. S. government. This is evidence that the banks are de-leveraging and are attempting to clean up their balance sheets. More detail of this behavior is presented below.
The total amount of cash assets in the banking system was $1.1 trillion in the banking week of August 26. This amounted to 9.3% of the total assets in the banking system as total assets averaged $11.8 trillion for the week. Note that banks were required to hold an average of only $62 billion ($0.06 trillion) in reserves behind their deposits during the two week period ending August 26. The excess reserves in the banking system averaged around a whopping $0.8 trillion during this same two week period. (The peak level of excess reserves in the banking system was about $0.85 trillion in the month of May.) Also, note that bank reserve balances with Federal Reserve Banks averaged around $0.83 trillion in the banking week ending August 26.
Beginning in December 2008, the banking system has held an average of $0.76 trillion in excess reserves every succeeding month. Before September 2008, the banking system held, on average, $0.002 trillion in excess reserves. To put these figures in context, bank assets in the banking week of August 26, 2009 were only $0.8 trillion larger than they were in the banking week of August 27, 2008. Thus, the entire increase in bank assets over the previous 52-week period was in cash assets!
The banks certainly have not been lending or investing. Over the past 13 weeks, commercial banks reduced their holdings of securities by $335 billion and they also reduced their holdings of loans or leases by $237 billion.
The interesting shift in the investment portfolio is in government guaranteed mortgage-backed securities. These have been increasing over the past 13 weeks. (See the Wall Street Journal article “Banks Load Up on Mortgages, in New Way,” http://online.wsj.com/article/SB125253192129897239.html#mod=todays_us_money_and_investing.) The banks have also been purchasing U. S. Treasury and Agency (non-MBS securities) issues over the same time period.
The big decline in security holdings has been in Mortgage-backed securities that were not guaranteed by the federal government or a government agency. Here it is important to note that the banking system still holds more than $200 billion in non-government guaranteed mortgage-backed securities and over $700 billion in assets that include other asset-backed securities, other domestic and foreign debt securities, and investments in mutual funds and other equity securities with “readily determinable fair values.” The banks were obviously chasing yield by investing in these securities. Over 75% of these holdings are in large commercial banks with small banks primarily investing in this category in state and local government securities, although this may not be comforting.
The decline in loans and leases spans the board. Commercial and industrial loans are down by $57 billion in the last 13 weeks whereas these loans are down by only $68 billion over the past 52 weeks. This decline seems to be speeding up as the decline over the last four weeks totaled about $34 billion.
Real estate loans are actually higher now than they were a year ago, but the volume of these loans is now decreasing. Home equity loans are down by $9 billion over the previous 13 weeks, residential loans are down $40 billion over the same time period, and commercial real estate loans have fallen by $29 billion.
Consumer loans are about the same as a year ago, as is credit card debt and other revolving credit. However, these figures have shown weakness over the past three months with total consumer credit declining by about $39 billion and the credit card and revolving credit debt falling by about $26 billion.
The commercial banking system continues to restructure. It is maintaining high levels of cash and is moving into less risky interest earning assets. The banking system, net, is not lending. We continue to hope that the restructuring will continue to occur without further surprises. Strong economic recovery, however, will not occur with bankruptcies and foreclosures remaining at high levels and with unemployment continuing to increase. Banks are not going to lend into this environment.
The bottom line from this analysis: the economy is recovering but economic growth will be anemic. Economic growth will remain anemic as long as the banking system stays on the sidelines.
Overall, banks, during the last 13-week period, have reduced, at a more rapid pace, their holdings of loans and investments as write-offs have increased, as there has been little incentive to make new loans, and as the banks have gotten out of securities that are not issued or guaranteed by the U. S. government. This is evidence that the banks are de-leveraging and are attempting to clean up their balance sheets. More detail of this behavior is presented below.
The total amount of cash assets in the banking system was $1.1 trillion in the banking week of August 26. This amounted to 9.3% of the total assets in the banking system as total assets averaged $11.8 trillion for the week. Note that banks were required to hold an average of only $62 billion ($0.06 trillion) in reserves behind their deposits during the two week period ending August 26. The excess reserves in the banking system averaged around a whopping $0.8 trillion during this same two week period. (The peak level of excess reserves in the banking system was about $0.85 trillion in the month of May.) Also, note that bank reserve balances with Federal Reserve Banks averaged around $0.83 trillion in the banking week ending August 26.
Beginning in December 2008, the banking system has held an average of $0.76 trillion in excess reserves every succeeding month. Before September 2008, the banking system held, on average, $0.002 trillion in excess reserves. To put these figures in context, bank assets in the banking week of August 26, 2009 were only $0.8 trillion larger than they were in the banking week of August 27, 2008. Thus, the entire increase in bank assets over the previous 52-week period was in cash assets!
The banks certainly have not been lending or investing. Over the past 13 weeks, commercial banks reduced their holdings of securities by $335 billion and they also reduced their holdings of loans or leases by $237 billion.
The interesting shift in the investment portfolio is in government guaranteed mortgage-backed securities. These have been increasing over the past 13 weeks. (See the Wall Street Journal article “Banks Load Up on Mortgages, in New Way,” http://online.wsj.com/article/SB125253192129897239.html#mod=todays_us_money_and_investing.) The banks have also been purchasing U. S. Treasury and Agency (non-MBS securities) issues over the same time period.
The big decline in security holdings has been in Mortgage-backed securities that were not guaranteed by the federal government or a government agency. Here it is important to note that the banking system still holds more than $200 billion in non-government guaranteed mortgage-backed securities and over $700 billion in assets that include other asset-backed securities, other domestic and foreign debt securities, and investments in mutual funds and other equity securities with “readily determinable fair values.” The banks were obviously chasing yield by investing in these securities. Over 75% of these holdings are in large commercial banks with small banks primarily investing in this category in state and local government securities, although this may not be comforting.
The decline in loans and leases spans the board. Commercial and industrial loans are down by $57 billion in the last 13 weeks whereas these loans are down by only $68 billion over the past 52 weeks. This decline seems to be speeding up as the decline over the last four weeks totaled about $34 billion.
Real estate loans are actually higher now than they were a year ago, but the volume of these loans is now decreasing. Home equity loans are down by $9 billion over the previous 13 weeks, residential loans are down $40 billion over the same time period, and commercial real estate loans have fallen by $29 billion.
Consumer loans are about the same as a year ago, as is credit card debt and other revolving credit. However, these figures have shown weakness over the past three months with total consumer credit declining by about $39 billion and the credit card and revolving credit debt falling by about $26 billion.
The commercial banking system continues to restructure. It is maintaining high levels of cash and is moving into less risky interest earning assets. The banking system, net, is not lending. We continue to hope that the restructuring will continue to occur without further surprises. Strong economic recovery, however, will not occur with bankruptcies and foreclosures remaining at high levels and with unemployment continuing to increase. Banks are not going to lend into this environment.
The bottom line from this analysis: the economy is recovering but economic growth will be anemic. Economic growth will remain anemic as long as the banking system stays on the sidelines.
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