Wednesday, October 1, 2008

Banks are lending by the bushel

Completely contradicting the prevailing view that bank lending is frozen, this chart shows that lending activity to small and medium size business continues to expand. Indeed, through the end of September, C&I Loans were up 12.8% from year-ago levels. How can we square the very healthy growth of lending activity with the fact that the TED spread, as well as other measures of banking fear such as 2-year swap spreads, are at or near record highs? Banks and large institutions are apparently deathly afraid of lending to each other, but seem to have no qualms about lending to the average business.

Banks are no longer buying securitized subprime loans, of that we can be sure. But they are recycling the savings of America into other areas; that's what this chart shows. Lending to subprime borrowers is down to zero, while lending to traditional borrowers is up big-time.

That highlights the unique nature of this financial crisis. It is not your typical bank crisis, which typically is the result of a credit squeeze engineered by tight monetary policy from the Fed. It is not the result of a shortage of money, since all measures of money supply show it is in plentiful supply.

What's going on? I've noted the problem with mark to market accounting, as has Brian Wesbury. Today, Holman Jenkins delves further into the issue:
we're talking about a regulatory trap for equity, created as an unintended consequence of a well-meaning accounting rule. Short sellers see this trap and try to exploit it. Uninsured lenders and depositors see it and worry about not getting paid back. That fear is why banks have all but stopped lending to each other --
In essence, banks have been caught up in a perfect storm: inflexible accounting rules, distressed pricing for subprime securities, and the government's urge to seize banks before they actually fail. Anyone with sizeable amounts of cash on deposit, or anyone entering into a deal with a bank that leaves him or her on the hook if the bank happens to get seized tomorrow morning, is just terrified of doing business with a bank.

That's the equivalent of throwing some sand in the gears of commerce, but it's not enough to shut down the economy. There are plenty of ways for borrowers to access the funds that savers are setting aside. Larger companies can tap the nonfinancial commercial paper market, where outstanding loans have been growing over 8% a year steadily over the past 5 years. Traditional mortgage lending has grown at double-digit rates in the past year.

For the past few decades, banks have really been more of a conduit than a source of funds; they process and clear checks, they process and sell mortgage loans, and they take in deposits and lend them out to individuals and small businesses. They long ago got out of the business of managing money; that's done by professional money managers these days.

So this problem is not a catastrophic problem. We are not in such dire straits that the government needs to engage in some massive intervention to save the economy. We simply need to solve the problem of banks' balance sheets. It's a paper problem, not an economic problem.


egp said...

Everybody and anybody here in Europe is calling for more and stricter rules to regulate those greedy banks and bankers. And now you (the Americans) think about slackening the chains! The Atlantic Ocean again is getting a bit deeper.

Go ahead and good luck, Bob

CDLIC said...


Perhaps you will secure a better understanding of cause and effect regarding "stricter rules" and "regulating those greedy banks and bankers" by re-reading Scott's previous posts and then read the following article from Capitalism Magazine titled 'Key Points on a "Rescue" Plan From A Healthy Bank's Perspective'.

Go to:


Scott Grannis said...

I suspect egp is writing tongue in cheek.

CDLIC said...


Good point. I chew on that.