Spring 2009
Banks Continue to Lend Even in This Difficult Economic Environment
The core business of banking is lending. Banks will continue to be the source of financial strength in their communities by meeting the financial needs of businesses and individuals in both good times and bad. Since banks are a reflection of their communities, banks are suffering in many areas of the country right along with the communities they serve. It is important to keep in mind that most banks are small businesses. In fact, over 3,400 banks (41 percent) have fewer than 30 employees. Lending Growth is Unusual in Recessions Even with the economy faltering and individuals and businesses reducing their borrowing, banks have continued to lend. This is in contrast to the lending trends during other recessions. Typically, loan growth shrinks during a recession as loan demand falls. (See the chart on commercial bank loan growth at the right). During the current recession, business loans have expanded by 12 percent and consumer loans by 9 percent; in contrast, median business loans declined by 0.7 percent and consumer loans by 5.1 percent for the previous six recessions.
Commercial Bank Loan Growth
Inflation-Adjusted Year-Over-Year Percentage Growth Business 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Consumer Recession
1970
1977
1985
1993
2000
2008
Source: Federal Reserve
New Credit is from Traditional Bank Lending, as Non-Bank Credit Has Shut Down While banks have been lending, they cannot offset the dramatic fall off of credit outside the banking industry. Thirty years ago, banks provided about 60 percent of all credit – today traditional bank lending provides less than 30 percent. The collapse this past year of the secondary markets for mortgages and other consumer credit products, such as credit cards and auto lending, has taken out an important pipeline of credit. Thus, many of the stories about the lack of credit are due to the weakness of non-bank lenders and the weakness of the securitization markets.
Outstanding Financial Market Credit
$ Trillions
$40
Total Credit from Financial Institutions
(Left Axis)
70% 60%
$30
Banking Credit as % of Total Financial Credit
(Right Axis)
50% 40%
$20 30% $10
Banking Credit
20% 10%
$0 1960
(Left Axis)
0%
1966
1972
1978
1984
1990
1996
2002
2008
Source: Flow of Funds
When non-bank sources of funds disappeared following the bankruptcy of Lehman Brothers and emergency support for AIG, Fannie Mae and Freddie Mac, large businesses turned to banks to meet their short-term credit needs. Without bank financing for businesses – which increased by $345
billion from September 10 to October 22 alone – the crisis would have been much greater as payrolls and payments to suppliers would have been disrupted.
AMERICAN BANKERS ASSOCIATION
Spring 2009
Loan Demand is Down In spite of the difficult economic environment, only 8 percent of small businesses reported problems in obtaining the financing they desired, and regular borrowing was “typical of the past 20 years” (according to a March 2009 survey by the National Federation of Independent Businesses, NFIB). The report noted that: “The credit worthiness of potential borrowers has also deteriorated over the last year, leading to difficult terms and higher loan rejection rates, even with no change in lending standards.” Borrowers are being more careful, and, as would be expected in this economy, the overall demand for loans is declining, although this varies by market. (See the chart on Commercial and Industrial Loan Demand above.) With fewer customers, businesses experience a reduction in the need to finance inventory, buy equipment or expand operations. It is almost certain that loan demand in this economy will continue to decline, and there is evidence that traditional bank credit is now marginally declining. However, as the economy starts to grow again and loan demand increases, the ability of banks to meet these needs will be stunted if adequate capital is not available to back increased lending. Mixed Messages Discourage New Lending Banks hear the message to continue to lend to help stimulate the economy, and they are doing their best to act on it. But they also hear messages that pull them back: from field examiners that may apply overly conservative standards; from FDIC premium assessment rules that penalize banks that use Federal Home Loan Bank advances for short-term liquidity; and from accounting rules that overstate economic losses. Most recently, the FDIC announced a proposal to charge banks a onetime special assessment (in addition to the regular premium payments paid to FDIC), which would take more than $15 billion out of the economy in the second quarter. Any one of these challenges could be handled on its own; but taken collectively, the impact is a nightmare for banks. All of these forces work against lending that is so critical to our economic recovery.
AMERICAN BANKERS ASSOCIATION