Lending Metrics, Part II: Are Businesses Borrowing?

In Part I of this series of posts on lending metrics, we looked at the use of lending volumes to indicate whether or not banks are lending, arguing it is a poor indicator of current lending. A closer look that breaks down the numbers reveals that banks initiated roughly $1.2 trillion in new loans in 2009 – a remarkable accomplishment in difficult economic times.

Today we’ll look at loan demand – the metric that illustrates whether people and businesses are borrowing. According to the Federal Reserve, banks have been experiencing a deep fall off in loan demand (see the chart below) – no surprise during this, or previous recessions. High levels of unemployment clearly are affecting consumer loan demands; businesses as well either do not want to take on additional debt or are not in a position to do so, given the falloff in their customer base.

The decline in loan demand continues, but there are fewer banks reporting a falloff of demand. And some positive signs are beginning to appear, as more small businesses are returning to test the market for loans, even though they may not wish to borrow at the moment. It will take time for this renewed interest to be translated into new loans made, however. In fact, our research shows that it typically takes 13 months after the recession for business confidence to return and credit to return to pre-recession levels.



Also see Lending Metrics, Part I: Are Banks Lending?
And Lending Metrics, Part III: Are Businesses Using Available Credit?

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?

Delinquency Improvements Due to Jobs and Housing; More Work to be Done

The second consecutive quarter of broad-based decline in consumer delinquencies is very positive news. It shows that consumers are managing their finances better and that banks are exercising a very prudent approach in realizing losses and extending sound credit. It’s also a strong indication that the economy is on an upswing.

Consumers are doing better. They’re taking on less debt, they’re saving more, and they’re building up a little buffer, which is extremely important in these uncertain economic times. Consumers are being sensitive to the debt that they’ve taken on and they’re trying to lower that debt as best they can.

There are a couple of factors that have played prominently in this report. Jobs are the most critical factor in determining consumer credit delinquencies, and we’ve had a horrible string of job losses over the last 18 months. We’ve finally started to see some improvement in new jobs created, but it won’t be until we see a steady increase in jobs that we’ll see delinquencies come down from the levels we’ve had over the last year or so.

Housing continues to struggle, and we did see home equity loans with a fixed repayment increase to record levels. The very good news, though, is that home equity lines of credit fell quite dramatically. This is the first sign of spring in a horrible winter for the housing market.

Lending Metrics, Part III: Are Businesses Using Available Credit?

Loan demand, as we discussed in the last post, has declined dramatically at banks as the economy slipped into a recession. One concrete demonstration of this slowdown in demand is just how much people and businesses are actually using their outstanding lines of credit. The fact that banks have been reducing the maximum lines of credit to help manage risk exposure in a weak economy has sometimes been (mis)interpreted as an unwillingness on the part of banks to lend. Like the bank lending volume measure we discussed in the first post, such an interpretation misses the mark.

In fact, even with the cutbacks in lines of credit, there is $6 trillion in unused commitments made available by FDIC-insured banks. Moreover, the utilization rates have declined for business lending, reflecting the decreased demand. Credit card utilization rates have risen somewhat, but the rate remains low overall at 18.7 percent, and demonstrates that there is a considerable amount of credit available for card holders. Just as businesses are more cautious in taking on new debt, so are consumers, which is the major reason why revolving debt outstanding has declined consistently for the last 16 months.





Also see Lending Metrics, Part I: Are Banks Lending?
And Lending Metrics, Part II: Are Businesses Borrowing?