The Year in Lending
Loan volume began to pull out of a long decline in the second quarter 2011 (see circled area). Lending last grew in late 2008 as borrowers drew on credit lines during the height of the financial crisis. Loans then began dropping sharply, with the exception of an artificial spike in the first quarter of 2010 that resulted from an accounting change. Meanwhile, balance sheets had been filling with securities and cash. The latter was the by-product of the Federal Reserve's emergency lending and quantitative easing programs. Data is for domestically chartered commercial banks.
The growth has been concentrated entirely in commercial and industrial loans, however, with commercial real estate lending continuing to atrophy.
Similarly, single family mortgages and consumer loans on bank balance sheets contracted this year. (The growth in consumer loans in 2010 reflects the consolidation of securitized credit card assets under new accounting rules.)
Year-over-year changes in business lending have generally lagged swings in credit demand and shifts in underwriting cycles over the past decade. Fewer lenders reported easing standards in the Fed's fourth quarter Senior Loan Officer Opinion Survey than in preceding quarters, and lenders reported softening demand. Both are regarded as negative signals for future loan growth, although figures from 2006 and 2007 show that healthy borrowing is possible in the absence of loosening lending standards and flat or negative demand. Meanwhile, recent employment and consumption reports show renewed economic momentum.
Banks have just begun to report that they are modestly loosening terms on commercial real estate loans a staple for small and midsize institutions. The number of banks reporting stronger demand began to substantially exceed the number reporting weaker demand in the first quarter. Lending volumes have continued to show sharp year-over-year declines.
Banks' decision to reduce the portion of their balance sheets devoted to single-family mortgages in 2011 reflects the importance of capital considerations. Individual loans have higher risk weightings than do government-guaranteed bonds filled with them. Home loans on banks' books hovered between 21% and 22% of the total mortgage market during the first three quarters.
Mortgage production volumes fell in 2011 from the prior year despite another sharp drop in interest rates. Many homeowners who qualified for mortgages had already refinanced into cheaper loans. Even so, the profitability of originations soared in late 2011, as reflected in the difference between consumer and secondary market rates. (The relationship between asset prices and yields is inverted, so higher consumer rates relative to secondary market rates indicate greater profitability for lenders, which mostly re-sell mortgages to investors.) The wide margins were largely due to production bottlenecks that cropped up as broader market rates dropped suddenly: lenders tend to lower rates for consumers with a delay as they devote origination personnel to customers willing to borrow at higher rates first.
The year-over-year contraction in revolving credit mostly credit card loans narrowed as 2011 progressed. Nonrevolving credit, which mostly involves auto and student loans, began to show year-over-year growth in late 2010, thanks to federal loans.
When are banks going to start lending again? In 2011, it turns out, though the growth was exclusively in business loans as real estate and consumer portfolios continued to shrink.
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