The continuing collapse in bank lending has been of a piece with the severity of the Great Recession, but it has relatively recent precedent.
According to estimates from the Federal Reserve, commercial bank loans totaled $6.7 trillion in December. Adjusted for inflation, that's a 3.7% reduction since midyear, perhaps the appropriate bookend for the cycle since the economy started growing again in the third quarter.
Compared with the five previous recessions, the pullback is nearly the most severe this far into a recovery (see graphic below), but the decline was steeper in the 1970s — six months after the recession that ended in March 1975, commercial bank loans were down 4.4%.
The forces that drive loan volumes have changed radically over the past four decades, including dramatic shifts in the inflation and interest rate environment, and the development of securitization and a massive shadow banking system that siphoned borrowers away from traditional portfolios.
Different categories of loans have also followed divergent paths. Except for after the recessions in the early 1980s, commercial and industrial loans underwent sharp, protracted tumbles. (So far, the decline during the current cycle has been the sharpest in recent history. Large companies' access to capital markets, spare capacity that erases demand for funds for investment and the generation of cash from business operations after deep cost cutting have widely been cited as factors behind the drop.) By contrast, real estate loans soared soon after the 2001 recession in a prelude to the latest meltdown.
But previous episodes have established a model for loanless recoveries. After the 1973-75 and 1990-91 recessions, commercial bank loans remained below their levels at the end of the downturns for more than 18 months, while lending volume was roughly flat after the 1980 recession. (Loans increased through much of the 1981-82 recession, which came hard on the heels of its immediate predecessor, and afterward. Loan growth also resumed relatively quickly after the mild recession in 2001.)
And economists have highlighted unique factors that are now weighing against a rebound in lending. Among those, banks are slowly working through the wreckage left by the bursting of an epochal credit bubble and have ratcheted up loan standards. Meanwhile, households are saddled with a far larger amount of debt as a percentage of gross domestic product than during any other recovery in more than 60 years and have been increasing savings.