If C&I Has Bottomed, Steep Climb Remains

If business lending by banks bottomed out late last year, a longer view provides a sobering reminder of how much ground would have to be recovered to reach pre-recession levels.

After accounting for inflation, seasonally adjusted data from the Federal Reserve shows that commercial and industrial loans at domestically chartered commercial banks in December — 18 months after the recession officially ended — remained almost 25% below their peak more than two years before (see charts).

The drop in total lending appears much smaller, but only because of the consolidation of about $440 billion of loans early last year under new accounting rules for securitizations. (Only about $24 billion of C&I loans were added to balance sheets as a result of the same change.)

Still, while total lending has continued to slip, C&I lending appears set to overtake the course set after the 1990-91 recession if it holds steady or manages a sustained upswing. The initial drop was steeper this time, but it took more than two and a half years after that recession for C&I loans to hit bottom.

Moreover, the most recent peak-to-trough swoon has been exaggerated by a spike in bank credit during the middle of the recession as alternative sources of financing froze and borrowers turned to depositories. Compared with outstanding C&I loans the month before the recession began, the December level represents an 18% drop.

Nevertheless, there is reason to believe that business loan demand will remain soft, with corporations continuing to generate large amounts of cash internally from handsome profits.

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