New Jersey Detects Strong Evidence of Credit Crunch

This is an edited version of a statement by Mr. Connor, the New Jersey banking commissioner, describing his agency's recent review of credit availability.

In June 1990, the New Jersey Department of Banking held a hearing to determine whether a credit crunch existed and, if so, to what extent. Testimony came from over 20 representatives of various businesses and trade groups, particularly the construction industry.

That testimony and subsequent statistical data made it evident that a credit crunch existed in New Jersey in the real estate construction industry and, to a much lesser extent, in businesses not related to real estate. There was no evidence of a credit crunch in mortgage financing for completed housing.

Because of the S&L crisis, savings and loans had $5.6 billion less in loans outstanding on Dec. 31, 1990, than a year earlier, down to $28.8 billion outstanding from $34.4 billion outstanding on Dec. 31, 1989.

Commercial banks had $2.2 billion less in loans outstanding, down to $60.1 billion outstanding from $62.3 billion outstanding the previous year. Thrifts were relatively flat at $10.8 billion in loans outstanding.

Sure Signs of the Crunch

Total loans outstanding at depositories in December 1990 were thus down $7.7 billion from the previous year, to $99.8 billion from $107.5 billion. These figures are for national-and state-chartered banks and thrifts combined.

For the various types of loans made by commercial banks in New Jersey, one-to-four-family and nonresidential mortgage lending continued to show substantial growth during the last three quarters of 1990.

This is not true for real estate construction and commercial/industrial lending in commercial bank portfolios. In construction lending, the volume of loans outstanding is $5.3 billion, down from the high of $6.4 billion in September 1989.

During the same period, volume of real estate owned by commercial banks in New Jersey increased $650 million. There has also been a decline in the volume of installment and credit card loans outstanding to individuals. However, I believe this is more a reflection of demand. Consumers tend not to take on new debt during periods of economic downturn.

Thrifts in Similar Boat

Outstanding loans of savings banks at yearend 1990 were $10.8 billion, down slightly from $10.9 billion in December 1989 but almost exactly the same as in June 1989. The same trends noted for commercial banks can be seen in the savings banks.

Nonresidential and one-to-four-family residential lending continue to show good growth over the last half of 1990. Construction lending volume in savings banks was at $500 million, down $225 million from December 1989. Real estate owned by thrifts increased by $100 million over the same period.

It should be noted that the commercial banks and savings banks have maintained a good growth pattern for residential and nonresidential mortgage lending, while asset growth for both has been declining.

The asset growth in both groups, although not negative, can be considered flat. Deposit growth is somewhat higher than asset growth. During economic downturns, however, institutions tend to use some deposit growth to replace borrowings.

New Money in Short Supply

Deposit growth in commercial banks is now under 5%, while growth in the savings banks, growth is under 3%. Rates at these levels indicate that the industry is not obtaining new money since interest credits would normally give you growth rates greater than 5%.

The decline in the S&L figures - to $28.8 billion in outstanding loans at Dec. 30, 1990, from $34.4 billion at yearend 1989 - can be explained by the fact that 24 institutions in New Jersey with total assets of approximately $15.8 billion have been assigned to the Resolution Trust Corp. in the past two years.

When an institution is assigned to the RTC, it discontinues making loans. Therefore, total loans outstanding in the industry will continue to decline.

Through April 30, 1991, 115 thrifts have not been referred to RTC. These institutions had declined $1.4 billion in both assets and deposits during 1990.

Shift in Lending Sources

The trend for loans outstanding, down $2.6 billion to $22.3 billion at yearend 1990 from $24.9 billion at December 1989, is a larger decline than in assets or deposits. It can mainly be attributed to the fact that the industry uses a significant amount of debt to support lending ($5.7 billion at Dec. 31, 1988).

Capital regulations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 induce the reduction of reliance on borrowings to fund lending activities ($5.1 billion at Dec. 31, 1990). Until the thrift industry reaches a balanced level of debt, the volume of loans outstanding in the industry is expected to continue to decline.

The level of loan support in the commercial bank industry and the savings bank industry is about at the same level as it was in June 1989, with the emphasis supporting one-to-four-family and nonresidential permanent mortgage lending.

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