Business Lending is Increasing, Especially at the Largest US Banks

Business lending continues to accelerate in US commercial banking system according to the latest data released by the Federal Reserve System.  Although overall lending has not increased by much in the commercial banks, only about $27 billion year-over-year at all domestic and foreign-related institutions, business loans (commercial and industrial loans) rose by more than $95 billion. 

True, many of these loans have gone to support acquisitions and other uses that are not directly related to expanding economic expansion.  Still, it is good to see more life in this particular area of bank lending.

Most of the increase in business lending came from the largest twenty-five banks in the country and foreign-related financial institutions.  Business loans did increase modestly at the small- and medium-sized banks, but not by much.

Commercial banks continued to allow their real estate and consumer loans to run off, the largest declines coming in the commercial real estate area.  All real estate loans at commercial banks decreased by almost $160 billion, year-over-year, with $86 billion of the decline coming at the largest twenty-five commercial banks and almost $70 billion coming in the rest of the domestically chartered banks.  The largest proportion of these declines came in the commercial real estate area. 

Consumer loans declined by about $41 billion in the whole banking system, year-over-year, with $38 billion of the decline coming in the largest 25 banks.

On another note, one can still see how the Federal Reserve is helping to finance banks in the eurozone.  Cash assets in the whole commercial banking system rose by almost $620 billion, year-over-year, with the rise at the foreign-related financial institutions absorbing almost $490 billion of the total.  At the same time the net deposits to foreign offices at these foreign-related financial institutions rose by more than $590 billion.  The average increase in these net deposits to foreign offices over the past month was another $50 billion. 

The Federal Reserve has done what it can to supply liquidity to European-related financial institutions to help them through the recent financial crisis.

I still have substantial concern about the smaller commercial banks in the United States.  The statistics still do not look good to me.  The total assets at the “smaller” banks rose by about $58 billion over the last year, but over $39 billion of that increase came in the cash assets of these institutions.  Although business loans at these institutions rose modestly, as mentioned above, total loans at these “smaller” banks dropped by almost $60 billion.  These “smaller” banks are just not growing.

A very large number of these smaller banks are just “sitting on their hands” hoping to survive.  These banks are doing everything they can to work out their loan portfolios and to become more liquid.  The reserves for bad assets have declined, but these declines are coming at the healthier banks.  And, given the low interest rates that can be earned on securities, the profits of many of these smaller banks are not sufficient to help them recover from the bad assets that are still on their balance sheets.  It is just amazing the numbers related to bad commercial real estate loans that are on these balance sheets. 

One could say that the good news is still related to the fact that there are not major disruptions occurring in the commercial banking sector.  This “peace and quiet” allows the FDIC to close as many banks as need to be closed without a big fuss.  This year 85 banks have been closed, just under 2 per week.  This figure, however, does not include the decline in the number of banks still open due to acquisitions.  I am still expecting some 2,000 or so commercial banks to drop out of the banking system over the next five years or so. 

It is hard to imagine that bank lending will grow much in the future given all the vacant residential real estate and commercial real estate that is around and all the foreclosures that are still to come.  An examination of the commercial banking sector does not give us much hope about the possibility of a more rapid expansion of the economy. 

Fed Continues to Pump Reserves into Foreign-Reated Institutions in United States

Over the past thirteen week period the Federal Reserve has pumped roughly $350 billion of excess reserves into the banking system. 

From February 2, 2011 to May 4, 2011, cash assets at commercial banks rose by $400 billion.  (Cash assets at commercial banks can serve as a rough proxy for the measure excess reserves.)   

During the same time period, $306 billion of the $400 billion increase in cash assets of commercial banks in the United States went to foreign-related financial institutions.

On May 4, 2011, of the $1,586 billion of cash assets in commercial banks in the United States, 50%, or exactly half of these cash assets, resided on the balance sheets of foreign-related financial institutions.   

The quantitative easing of the Federal Reserve continues to support, in large part, the “carry trade” where funds generated in the United States continue to find their way into foreign markets. 

This is not the first time I have written on this subject: http://seekingalpha.com/article/265481-large-foreign-related-banks-now-hold-776-billion-in-cash-assets.  Actually, this is the third time I have written about the subject: http://seekingalpha.com/article/254004-why-is-most-of-the-fed-s-qe2-cash-going-to-foreign-related-banking-institutions.

Over the past four-week period, cash assets at all commercial banks actually declined by about $9 billion.  However, cash assets at the foreign-related institutions rose by $27 billion during this time period while cash assets at the largest 25 commercial banks in the United States fell by approximately $21 billion and they fell at smaller domestically chartered United States banks by $14 billion.

There is some good news, however!

The good news is that business loans, commercial and industrial loans, at commercial banks really seem to be on the up swing.  Over the past thirteen-week period, C&I loans have increased by $35 billion.  Roughly two-thirds of this increase, or about $23 billion, of the loans came from the largest 25 banks in the country.  However, C&I loans were only up modestly at the smaller commercial banks over this period. 

In the past four-week period business loans were up $10 billion and 60 percent of these, or $6 billion, came from the largest banks.  Again, C&I loans were up at the smaller institutions by a modest amount. 

So, banks, especially the larger banks, seem to be lending again to business, something that is vitally needed if the economic recovery now under way is to really pick up. 

If the goal of the Federal Reserve in conducting QE2 was to get business loans increasing again, then it seems to have succeeded.  Sure, we will have to wait a little longer to get more confirmation of this trend, but this is the first time in this cycle that business loans really do seem to be increasing.

The not-so-good news: the volume of real estate loans on the books of commercial banks continues to tank.  Over the past thirteen-week period, real estate loans at all commercial banks dropped by almost $90 billion.  Over the past four-week period, these loans declined by over $18 billion. 

Almost all of the decline has come at the largest 25 domestically chartered banks in the country.

Over the past thirteen weeks, the major part of the decline came in the area of residential loans ($41 billion), which was closely followed by the fall in commercial real estate loans ($34 billion).  In the past four weeks, the bulk of the decline came in the residential area ($12 billion). 

So, business loans appear to be picking up but the real estate market continues to decline: mixed signals for any sustainable economic recovery.

Maybe, however, this is all the Federal Reserve hoped to achieve at this time.  It seems as if almost everyone believes that it will still be a while before the real estate markets, both residential and commercial, bottom out and start to pick up steam. 

Maybe all the Federal Reserve thinks it can do is to get businesses borrowing again and with that borrowing put some people back to work.  And, it seems that if the Fed can achieve this small win it would think that flooding the rest of the world with United States dollars has been worth it.   

It would be too bad if a substantial part of the uptick in business lending was just going to finance the merger and acquisition activity of large businesses: http://seekingalpha.com/article/269056-the-latest-merger-binge-and-the-economy.   

Commercial Banks Closures in 2011

The Federal Deposit Insurance Corporation oversaw the closing of six banks on Friday, April 15.  This brings the total for 2011 up to 34 banks, a pace of about 2.3 banks per week. 

In 2010, 157 banks were closed, a pace of about 3.0 banks per week.

The problem bank list published by the FDIC every quarter rested at just under 900 banks (out of 6,529 banks in the banking system) on December 31, 2010.  We are waiting for the release of this number for the March 31, 2011 date.

The other number that is important in this respect is the number of banks that were acquired or merged into other banks.  Last year there were 153 banks dropping out of the industry due to such consolidations. 

Thus, the number of banks in the commercial banking system declined by 310 units last year or at a rate of approximately 6.0 banks leaving the system per week.

Most of the banks dropping out of the banking system are smaller institutions.  However, last week a $3.0 billion bank was closed so it is not all just the very smallest banks that are leaving the system.  Still, it not the largest 25 commercial banks in the banking system, the banks that control almost 60% of the total assets of the industry, that are departing.

The question still remains about the health of this industry.  Is the number of problem banks in the industry going to remain around 900 institutions?  Are bank departures going to continue to run off at the rate of 5 to 6 banks a week?  Will these rates lessen this year?  Or, will they increase?

Supposedly, the condition of the smaller banks is getting better.  But, as we saw with Bank of America last week, the overhang of bad mortgage loans still plagues some institutions.  Right now, I believe that the drop off in foreclosures on residential mortgages is misleading because the whole foreclosure issue has become so political that we probably won’t really have a good idea about the situation in the housing industry and in loan writeoffs for some time. 

We do know, however, that there are a lot of commercial real estate loans coming due over the next twelve months and the word I hear about the refinancing of these loans is not good.  Vacancies in commercial properties remain high and cash flows have not picked up significantly.  Furthermore, as more and more political entities downsize, more and more office properties used by these state and local governments are being vacated.  This was not expected a year ago.

In addition, I am also hearing that more small- and medium-sized businesses have exhausted their efforts to re-structure and just cannot go on much further.  As their loans come due, they are informing their banks that they are not going to be able to pay off their loans and must re-finance.

Thus, the banks have to make a decision about whether or not they roll over the loans for another period of time.  Or, do they “bite the bullet” and say they just cannot keep the loan going with no real sign that things are going to get better.

Then there are the examiners looking closely over the shoulders of these bankers.  The regulators are still running scared and, given all the restructuring of the regulatory institutions, don’t want to have the people in the new regulatory alignment holding them accountable for being too easy on these “failing” banks.  There is enough finger-pointing going on with respect to the “lax” regulatory environment that existed in the past. 

Bankers, especially from the smaller banks, feel caught in the middle of this exercise.  They want to do what they can to help their customers survive.  Yet, they are being pressed by the regulators, who also feel they are under excessive pressure, to not show overly-optimistic hopes about the ability of these businesses to repay.   In fact, the result may be that a too pessimistic approach is taken toward the quality of the bank loans. 

As a consequence, we will probably see the list of problem banks remain somewhere around their current highs and we will probably see business loans and commercial real estate loans continue to decline on the balance sheets of the banking industry. 

And we will continue to experience a decline in the number of banking institutions in the United States. 

The crucial element of this decline is that it is that the decline takes place in an orderly fashion. 

I believe that the Federal Reserve has contributed greatly to the achievement of this orderly reduction in the number of commercial bans in the banking industry.  Keeping short-term interest rates so low and pumping so much liquidity into the banking industry has reduced what could have been a very chaotic evacuation into a relatively peaceful exodus. 

Of course, there are other consequences to the Fed’s policy and we will have to deal with those in the future.  For now, the Federal Reserve has kept the banking system open.

Until the history of the recent financial collapse is fully understood and written up, most of us will probably not know how serious the banking crisis has been.  We get bits and pieces of this seriousness, but government officials have not really believed that the depth of the problem should be presented to the rest of the world.

For example, buried in the column Global Insight by Tony Barber in the Financial Times this morning is this observation: “For the truth about the eurozone’s crisis…is that the rescues of Greece, Ireland and Portugal are at heart rescues of European banks…Restructuring these countries debts would involve losses for German banks…” (http://www.ft.com/cms/s/0/4ed1d54a-6915-11e0-9040-00144feab49a.html#axzz1JsjXsOj5).   But this is not what is expressed in most governmental commentary. 

It appears as if the credit inflation of the past fifty years in America, and in Europe, seriously infected the banks and the cure for this infection is taking a very long period of time to achieve and is creating, in the process, economic and financial dislocations that we may not fully recognize for many years. 

For now, however, we can only hope that the cure takes place in an orderly fashion.