June 02, 2009
More on bank lending data
Further evidence on the decline in bank lending.
Last week I highlighted the debate over the degree of the contraction in bank lending. Another issue that I neglected to mention is that the series on bank lending used by Chari, Christiano and Kehoe referred only to lending by commercial banks. When assets of failed thrifts are acquired by commercial banks, the result is that the measured loans by commercial banks go up even though aggregate lending may have gone down.
Zach Pandl of Nomura Securities calls my attention to their analysis which constructs a series that tries to correct for these reclassifications. Nomura found that these corrections eliminate the increase in bank lending that one would otherwise see in the original commercial bank lending data.
Posted by James Hamilton at June 2, 2009 06:01 PMdigg this | reddit
This is a valuable contribution, but it does not show enough history. The raw Fed data shows that bank C&I lending dropped on a 12-month comparison in six of the post World War II recession, by 1 to 10 percent.
(Data here: http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[id]=BUSLOANS&s[transformation]=pc1).
That suggests to me that what we are seeing, even with the adjustment, is typical recessionary behavior rather than credit crunch.
Posted by: Bill Conerly at June 2, 2009 08:49 PM
In a recent post you noted that a recovery requires growth not just a slowing of the rate of decline. Yet your subtitle here is "Further evidence on the decline in bank lending" even though the growth rates you report appear to remain in positive territory. In other words bank lending has rising, not declining?
Posted by: cbsurf at June 2, 2009 08:53 PM
As some have mentioned before I believe there is lack of demand by credit worthy borrowers. There is and will be a shift to thrift and savings versus comsumption (especially leveraged consumption). The economy (all facets thereof) must adjust to a lower demand running rate.
Posted by: Hondo at June 3, 2009 05:45 AM
I agree with cbsurf: most deflationists point to a "contraction in credit" in support of their thesis. The Fed's H.8 report for 4q09 still showed growth in total credit (including government lending). I would be surprised if the 1q09 report was any different.
From the perspective of our historical experience, bank lending is very weak.
From the perspective of our (structural) need to reduce total credit/gdp, and given the drop in gdp, stable bank lending will clearly not reduce our economy-wide leverage.
Posted by: David Pearson at June 3, 2009 06:55 AM
If the question being asked is, "To what extent has total lending fallen," then what strikes me as important is to look beyond commercial banks. Commercial banks are a much smaller share of total financial activity than they were 20 years agos, so that an increasing share of lending was happening in credit and ABS markets.
If you look at SIFMA's data on Asset Backed Security Issuances it has fallen off a cliff since 2008Q3. Since such a substantial share of credit card, real estate, corporate etc loans were securitized over the past several years, AND commercial banks have not stepped in to fill the gap, it gives me the impression that the total supply of lending is severely constrainted.
Posted by: mjohnson at June 3, 2009 07:28 AM
I would like to continue the discussion on two points made above; the need to reduce credit/gdp and aggregate credit demand.
I might argue that credit contraction may be lagged because ongoing obligations need to be financed - regardless of my want to pay a debt off I and the rest of America can only do-so so quickly. In much the same way durables may be a better proxy for consumer lending than bank loans themselves.
I've seen a lot of conjecture about aggregate credit demand but have yet to see a scholarly work addressing the matter. GM says that showroom traffic is only down 20% while sales are down 40% blaming unavailability of credit.
Posted by: JS at June 3, 2009 09:44 AM
As a commercial banker I would offer an anecdotal observation that there is a slowdown in borrowing. There is a lack of credit to certain sectors caused by the collapse of the securitization process. I attribute much of that collapse to a crisis of trust. There is an unwillingness to lend to certain sectors, i.e. real estate, that is typical conservatism in the face of a recession. Finally there is a very real lack of demand from creditworthy borrowers who are "on the sidelines" postponing expansion or acquisition awaiting either the "bottom" of the market or a definitive upswing.
Posted by: dwjohnson at June 3, 2009 10:30 AM
... If the question being asked is, "To what extent has total lending fallen," then what strikes me as important is to look beyond commercial banks. ...
exactly, mjohnson. look at the out-and-out collapse of the "shadow banking" securitization markets, as this is where the majority of credit contraction to date has taken place.
Posted by: gaius marius at June 3, 2009 11:53 AM
If a nation wishes to move from an economy based on excessive credit to one based on credit that can be repaid, reduction in the availability of credit is necessary and desirable.
During a recession, as dwjohnson notes, "credit that can be repaid" will be reduced from the level after the recession is ended. We need to overshot on the way down in reduction of credit.
Thus, I see nothing wrong with the current reduction in credit due to lack of securitization.
Less securitization of credit will push lending activities back on banks. Banks need some means of profits, so let securitization flounder for a while.
Posted by: ReformerRay at June 3, 2009 01:01 PM
I am actually shocked that commercial bank lending has not declined already during this recession (according to this data). As our society delevers from what most people agree was an unsustainable debt load, one would expect to see commerical bank lending decline for a while. Not all of that is necessarily bad. For instance, many commercial real estate companies have raised equity to pay down debt, which would show up as a decline in lending although it represents a change in the capital structure rather than a decline in the overall capital available for businesses.
Posted by: Gdog at June 3, 2009 01:44 PM
The decline in bank lending is misleading. The largest creditworthy borrowers are getting their loans, the decline is focused on the smaller borrowers. Two reasons: 1. During economic decline smaller borrowers are riskier due to lack of broad markets and lower access to alternative financing, and 2. The Administration has structured the operations of the Fed and Treasury to accomodate and support loans only to the largest borrowers e.g. try to discount at the Fed or pledge under any of its bailout programs a bunch of loans to small local companies - it just isn't going to happen. The major banks have been forced into supporting only the largest, most creditworthy borrowers.
Posted by: MT at June 19, 2009 05:53 PM