There seem to be three major stories in commercial banking these days: first, the cash going to foreign-related institutions; second, the pickup in non-real estate business lending; and three, the continued weakness in consumer borrowing.
Excess reserves at depository institutions in the United States averaged $1,509 billion in the two weeks ending January 25, 2012. Cash assets at commercial banks in the United States were $1,597 billion in the week ending January 25, 2012.
In December 2010, excess reserves were $1,007 billion and cash assets $1,082 billion.
Both excess reserves and cash assets rose by about 50 percent during this time period.
In recent years excess reserves at depository institutions and cash assets held by commercial banks have moved closely together. The reserves the Fed has injected into the financial system have gone primarily into cash assets.
It is interesting to note that of the $590 billion increase in cash assets at commercial banks, $403 billion went onto the balance sheets of foreign-related institutions in the United States.
For the week ending January 25, 2012, roughly 47 percent of all the cash assets held in commercial banks in the United States were held on the books of foreign-related institutions. This is up from about 32 percent in December 2010.
Note: These foreign-related institutions hold only 14.5 percent of the total assets in the United States banking system (up from about 11 percent a year earlier) so they are now holding a disproportionate share of the cash assets in the banking system.
On the liability side of these foreign-related institutions there was a net increase in “net (deposits) due to foreign offices of $625 billion and a decrease in US held deposits (large time and other deposits) of $185 billion. Thus, the right side of the balance sheets of these foreign related institutions rose by a net amount of $440 billion related to movements of funds “offshore”, i.e., primarily to Europe.
The Federal Reserve has not only supplied liquidity to the European continent through dollar swaps with foreign central bank, it has supplied funds to international financial markets through its open market operation.
It is not expected that many of the funds going to these foreign-related financial institutions will go into loans in the United States market as these institutions only hold about 8 to 9 percent of all commercial loans in the United States.
Therefore, when we look at what the Federal Reserve has done, we have to realize that only about fifty percent of the funds the Fed has injected into the banking system has gone to domestically chartered banks. It is only this domestic portion of the Fed’s injection of funds that can have the greatest possibility of impact on business lending and hence economic growth.
Cash assets did increase at domestically chartered commercial banks during this time period: the increase was about $112 billion as total assets grew by $243 billion. At the largest twenty-five banks in the country, the increase was $75 billion in cash assets and $130 billion in total assets.
The important thing is that business loans (Commercial and Industrial loans) at commercial banks have been increasing, primarily at the largest twenty-five domestically chartered banks in the United States. From December 2010 to December 2011, C&I loans rose by $123 billion in the commercial banking system, with $94 billion of this increase coming at the largest twenty five banks, a 15 percent year-over-year rate of increase.
Business loans did increase at the rest of the domestically chartered US banks, but they rose by only about $18 billion or about 5 percent year-over-year.
Over the past thirteen-week period, however, C&I loans at these smaller banks hardly increased at all and actually fell over the last four-week period.
At the largest banks, business loans continued to rise over the past four weeks ($15 billion) and over the past thirteen weeks ($35 billion). My question about these increases has to do with the uses that the funds are being put to. The national invome statistics showed that inventories increased in the latter part of last year and these loans could have gone to increase the inventory buildup. Many economists seem to believe that given the weak consumer behavior (see below) that the inventories will decline in the first quarter of 2012 and this will result in some weakness in business loans. Alternatively, some of the borrowing could be so that corporations could buildup cash positions for either acquisitions or for stock repurchases. There does not seem to be any inclination to increase spending on business plant or equipment.
Commercial real estate loans continue to decline at the smaller banks in the country although there has been a pickup in these loans at the largest banks. All-in-all, lending on commercial real estate continues to go down: and given all the loans that will mature over the next 12 to 18 months, with many of them being unable to re-finance, there is a continued likelihood that these loans will continue to decline in the near future.
On the other hand, residential mortgage lending rose across the board at commercial banks. Although residential mortgages fell on the books of the banks from December 2010 to December 2011 by $12 billion, over the past thirteen-week period, these mortgages grew by almost $19 billion, with $11 billion of this increase coming in the last four weeks. And, the increases came in all sizes of banks.
This line item will be interesting to watch over the upcoming months since housing prices continue to decline and foreclosures and bankruptcies seem continue to occur at a rapid pace.
Just a further note on real estate lending: home equity loans have declined over the last thirteen weeks and held roughly constant over the past four.
Counter to this increase in residential spending is the decline in the dollar amount of consumer loans on the books of the banks. Over the past six months consumer lending has dropped by a little more than $6 billion with a major decline of roughly $15 billion coming over the last four weeks. Most of this decline has come in credit card debt outstanding at the banks.
This information on consumer lending seems to point to a continued weakness in consumer expenditures.
In terms of the domestic economy it seems as if there is not much encouragement for a stronger economic recovery in the banking numbers. There seems to be little demand for any kind of loans in the current environment, but, one also gets the feeling that the banks, especially the smaller ones, are not willing to lend even if there were an increasing demand for loans.