Banks' Share of Lending Steady, But New Forces Appear

The banking industry's share of debt held by the financial sector slipped during the recession, but has remained fairly stable overall for the past decade.

With private-sector borrowing on the decline, securitization moribund and a sea change in regulation that might weigh on banks' competitiveness, however, a host of forces could alter the balance.

Debt held by the banking industry fell 0.8 point from the third quarter of 2007 — just before the recession began — as a portion of total financial sector lending to 29.9% in the fourth quarter, according to data from the Federal Reserve (see charts below). Lifted by the consolidation of off-balance-sheet vehicles under new accounting rules, it rebounded to 31.2% in the first quarter.

That range is in line with the roughly 30% to 32% share for banks earlier in the decade. Most of the churn among components of the financial sector during the past 10 years has involved offsetting trends in the shadow system and the government-sponsored sector, as issuance of Wall Street mortgage bonds ballooned and collapsed, sapping volume from the federal apparatus for home finance and then giving way to it.

One factor that could soon work against banks is the prospect that higher capital requirements will increase their funding costs and force them to offer less competitive lending rates.

Douglas Elliott, a fellow at the Brookings Institution, has reckoned that banks can manage substantially higher capital levels while only modestly raising rates — perhaps by about 20 basis points. In a paper this year, he argued that an increase of that magnitude would not drive much borrowing to other channels. Among other things, he cited banks' unique capacities as intermediaries, including their efficiency in using pools of deposits to provide liquidity to borrowers through revolving lines.

Because debt securities have for some time provided the majority of other forms of business credit, "borrowing that could most easily move to the capital markets or to other financial institutions has already shifted away from the banks," he wrote.

Still, noting the "intensity of competition in financial services" in a paper in July, Samuel Hanson, a graduate student at Harvard University, Anil Kashyap, a professor at the University of Chicago, and Jeremy Stein, a professor at Harvard, argued that tough curbs on leverage should be extended beyond depositories and nonbank financial giants alone — for instance by regulating margin requirements for funding holdings of asset-backed securities. The object would be to defend against excesses wherever they arise, and to reduce "the incentive for consumer loans to migrate off bank balance sheets and into the shadow banking sector."

[IMGCAP(1)]

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER