Lending Metrics, Part I: Are Banks Lending?

Often repeated – yet rarely investigated – in Washington and in the media is that banks are not lending. Critics of the banking industry point to a simple metric to support their conclusion – lending volume at the beginning of the year versus at the end of the year. At the end of 2009, lending volume was $600 billion less than at the beginning of 2009. But the factors that determine the ultimate level of lending are complex and cannot be captured in a simple comparison of volumes. A look at the chart below illustrates some of these factors and shows that, in fact, banks initiated roughly $1.2 trillion in new lending in 2009.

At the start of the year, total loans across all business lines on the books of banks totaled $7.9 trillion. Over the course of the year, banks set aside $248 billion in provisions for anticipated loan losses. This can be seen in the red bar in the center of the chart. In addition, a rough estimate is that at least $1.6 trillion of loans matured or were paid off, visible in the blue box. If banks had initiated no new lending, the year-end loan volume would have been $6.1 trillion.

Just to stay even with last year, banks would have to originate over $1.8 trillion of new loans. In normal times of economic growth and low loan losses, this is possible, but it’s impossible today with the many economic challenges, such as:

• 61,000 business failures,
• 4.7 million jobs lost, and
• 10 percent reduction in business inventories.

It is remarkable, in this context, that banks were able to originate about $1.2 trillion in new loans, for a total of $7.3 trillion at year-end.



Also see Lending Metrics, Part II: Are Businesses Borrowing?
And Lending Metrics, Part III: Are Businesses Using Available Credit?