Tuesday, April 19, 2011

Bank lending update

With the inflationary potential of the Fed's $1.5 trillion injection of reserves into the banking system apparently held in check by 1) banks' reluctance to lend and desire to strengthen their balance sheet with excess reserves, and 2) the world's apparent reluctance to borrow, it's vitally important to keep track of new bank lending. The easy way to do that is to watch the growth of M2, since that should reflect the net impact of any monetary expansion driven by new bank lending. But as my previous post detailed, M2 doesn't reflect any unusual expansion in the money supply to date.

The chart above, which focuses on bank lending to small and medium-sized businesses, is a more narrowly-focused look at bank lending, and it shows a clear and continuing uptrend in lending activity. It's still rather tepid, since this measure has only grown at a 7% annualized pace since December, but it marks an important inflection point and the start of a new lending cycle. Most importantly, it also reflects increased confidence on the part of banks and businesses, and that is a key ingredient for future growth in the economy.


sgt.red.blue.red said...

Mr. Grannis, if I refinance existing commercial (business) real estate loan(s), do these transactions show up in these data?

If it is with the same bank, or different bank, does it impact these data differently?

Scott Grannis said...

A refinancing does not add to the outstanding stock of business loans, which is what is shown in the chart. Unless of course the refinancing also increases the remaining loan balance.

Benjamin Cole said...

Most small businesses must borrow against collateral. That means they own real estate.

If commercial real estate rebounds, we will see more corrowing.

Sheesh, we need a lot more action, here.