Business Loans Continue to Increase

The largest twenty-five domestically chartered commercial banks in the United States continue to increase lending to businesses (Commercial and Industrial Loans) over the latest four-week period according to the most recent Federal Reserve data. Over the latest four-weeks ending November 2, large banks experienced a net increase in business loans by almost $11 billion. Over the latest 13-week period, these loans have risen by almost $28 billion.

From October 2010 to October 2011, the largest twenty-five banks have increased their portfolios of these business loans by a little more than $75 billion.

Still, one does not have a lot of confidence that these loans are going into areas that will contribute to the growth of the economy. Larger companies are still accumulating “cash” to buy back stock or to make acquisitions. Certainly the cost of borrowing is not a hindrance to these companies obtaining for these purposes these days.

Commercial and Industrial loans have also increased in the rest of the banking system, but by a little more than one billion dollars over the last four weeks, and by just over $9 billion over the past 13 weeks. It is not altogether clear what these loans are going for at the present time. Given that this $9 billion increase is spread through about 6,400 banks, the rise in lending at each bank, on average, is not too great.

The interesting thing about the lending in the smaller 6,400 banks is that residential real estate loans have shown some increase over the past 13-week period. Residential loans have risen by almost $25 billion over the past quarter, over $13 billion in the last four weeks alone. The indication is that in some places in the United States, residential lending activity has been picking up. We will have to watch this number closer in the upcoming weeks and months.

The softest area in lending still remains the commercial real estate area and the weakness is predominantly in the small- to medium-sized banks. These loans dropped by slightly less than $14 billion over the past 13-weeks, with more than half the decline at the smaller banks. Over the past 4-weeks the declines in commercial real estate loans have all been outside the largest 25 banks in the country.

All domestically chartered commercial banks in the United States reduced their holding of cash balance in the past 13-week period. The largest 25 commercial banks lowered their balances by $185 billion. The other domestically chartered banks reduced their holdings by only $10 billion. These decreases in cash balances came despite the fact that excess reserves in the banking system stayed relatively constant during this time period.

In summary, the latest Federal Reserve statistics indicate that the banking system, as a whole, is becoming less conservative. Business loans have been picking up for most of the last six months, especially at the largest 25 domestically chartered banks in the United States. The question mark here, however, is the use that borrowers are putting these funds to. It does not appear as if the loans are being used for productive purposes that would get the economy moving again.

The commercial real estate area continues to stay week, especially at small- and medium-sized banks. Here one still has questions about the quality of these loans on the balance sheets of the smaller banks and the implication of these difficulties for the future.

One further note: Consumer borrowing at all commercial banks continues to remain weak. Nothing seems to be happening in this area, which, again, has implications for future economic growth. The consumer seems to be more interested in getting his/her debt under control than to really engage in more spending. We will see what happens in this area as the holiday season approaches.

Closing note: The largest 25 commercial banks in the United States, according to the Federal Reserve data, represented 57 percent of the assets in the banking system on November 2, 2011; foreign-related depository institutions represented 14 percent; and the other (roughly) 6,400 domestically chartered banks represented 29 percent.

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