The American Banker article published March 13 titled “Four myths in the battle over Dodd-Frank” reported that “mortgage, auto and credit card lending have all gone up since 2010.” A complete understanding of the availability of bank credit requires analysis of the individual categories of lending, which was the approach pursued in the article. However, when we consider the available data on bank lending, there is a lot more to the story.

The solid loan growth at commercial banks in recent years has been concentrated in some of the sectors that appear least in need of credit. The strong loan growth has been mainly driven by lending to large businesses, auto loans (as noted in the article) and commercial real estate lending. While credit card loans have also grown as indicated, that growth has focused on borrowers with pristine credit scores. Moreover, despite the strong growth in auto lending over recent years, banks account for only one-third of the auto loan market and tend to lend to less risky borrowers.

Furthermore, loan categories to sectors most dependent on bank credit — small-business lending as well as home equity lines of credit, home mortgages and credit cards for households with less than pristine credit scores — have grown slowly or even contracted. For instance, small-business loans outstanding on banks’ books were about unchanged since the enactment of the Dodd-Frank Act in 2010. Small commercial real estate loans, which account for approximately half of small-business loans outstanding on banks’ books, declined about 2% on average over the past five years. In addition, as discussed in the article "Two-speed Economy Still Runs on Two Tracks," in the most recent issue of The Clearing House’s quarterly magazine Banking Perspectives, loan spreads over the three-month Treasury rate for unrated business loans are about 150 basis points more expensive than they were prior to the past recession; thus, borrowing costs have also likely gone up for small businesses. On the residential real estate lending side, home equity lines of credit declined more than 6% per year over the past five years, despite the significant appreciation in house prices, and are about 110 basis points more expensive than they were pre-crisis.

For mortgage lending the growth rate averaged about 3% over the same period, as the American Banker article notes; however, the distribution of borrowers is clustered at the top of the range of credit scores, and those with lower scores have very low chances of obtaining a mortgage.

The article also points out that mortgage rates are relatively low, which is driven by the very low level of interest rates. But, as shown in the Banking Perspectives article cited above, spreads on mortgages loans have risen for borrowers across the entire credit spectrum. In particular, loan spreads on jumbo mortgages and mortgages insured by the Federal Housing Administration and the Department of Veterans Affairs are almost 50 basis points higher than they were prior to the past recession.

Finally, it may be worth noting that aggregate annual loan growth on banks’ books slowed appreciably over the past four months: It was 2.6%, negative-1.3%, 0.8% and 0.6% for November through February, respectively. While this data is not cause for alarm, earlier growth against a low base is not cause for complacency.

Francisco Covas

Francisco Covas

Francisco Covas is the deputy head of research for The Clearing House Association.

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