Exhibit 1: Consumer and C&I loan growth remains healthy
This chart presents monthly consumer and commercial industrial (C&I) loan growth as reported by the Federal Reserve’s H.8 Tables through the end of October 2008. Consumer loan growth rose 1.8% in October and C&I growth surged 3.4%.
Exhibit 2: But Consumer and C&I lending standards have tightened substantially
This chart illustrates the Senior Loan Officer Survey for both consumer and C&I loans through September 2008. Consumer lending standards hit their peak in the second quarter of 2008, falling slightly in the third quarter. However, C&I lending standards continue to rise for small, medium, and large firms.
The paradox: How can loan growth still flow if bank standards are at record highs (tight)?
I argued that consumers were increasingly drawing on their revolving lines of credit, distorting the implications of aggregate consumer loan growth. Consumer loan growth is positive, but only because revolving credit is surging (which too has slowed since then). As credit card debt increases, the risk of a “revolving credit” crunch grows, which would certainly result in a sharp decline in consumer loan growth.
However, the Federal Reserve does not break down the C&I loan data into revolving and non-revolving lines of credit. Finally, the October Senior Loan Officer Survey presents some insight to the surge in C&I loan growth (3.4% in October): "In response to the special questions, significant net fractions of large domestic banks and U.S. branches and agencies of foreign banks reported increases in C&I loans drawn under preexisting commitments. Moderate fractions of all banks, on net, reported increases in C&I loans not drawn under such commitments."
So there you have it: the Federal Reserve’s aggregate growth for both Consumer and Commercial and Industrial credit is being driven by revolving (pre-existing) lines of credit. There is evidence that a credit crunch underway in spite of the surge in bank lending as reported in the H.8 tables, and no paradox exists.
I do believe, though, that with the U.S. government's obvious commitment to “buy” an economic expansion – a second stimulus package (up to $300 billion) early next year and the Fed’s balance sheet expected to reach $3 trillion by the end of the year – will eventually push through to the banking sector, and non-revolving lending will resume in early 2009.