Sunday, February 8, 2009

Consumer credit is bigger, much bigger than what the commercial banking system shows

Much of the Fed's targeted lending facilities have been focused on the commercial banking system. The reserve base sits at a record $661.8 billion, which is up $652.9 billion since this time last year. If you look at the Federal Reserve's H.8 statement of total consumer credit extended by the commercial banking system, you see that consumer lending - revolving and nonrevolving - is growing at a strong annual rate (see this post).

Given that credit markets are on high alert, and that banks report very tight credit conditions, it is remarkable that credit card lending continues to rise. But this is only part of the story - in fact, it is one-third of the story. Here is what the broader Federal Reserve's G19 report says about total consumer credit outstanding in December (which is lagged, and only reported on a monthly basis):
Consumer credit decreased at an annual rate of 3 percent in the fourth quarter. Revolving credit decreased at an annual rate of 5-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-3/4 percent. In December, consumer credit decreased at an annual rate of 3 percent.
On the whole, revolving credit dropped two consecutive months (November and December).

The chart illustrates the change in total consumer credit, revolving and non-revolving. This includes everything - car loans, student loans, and accumulated credit card debt (revolving). Consumers are paying down debt, either by force or by choice. But December's decline in revolving credit, -$6.3 billion, is the largest decline on record since 1968 (the first data point for revolving credit).

Total consumer lending by type of institution tells a slightly different story from the H.8 statemnt of credit extended by banking institutions.

This chart illustrates the annual growth in consumer credit outstanding by type of institution: commercial banks (the H.8 statement) plus credit unions plus saving institutions, securitized pools, finance companies, federal government and sallie mae, and nonfinancial businesses.

All government regulated lending - commercial banks (around 5.1%) and federal government and sallie mae (12%) - is growing at a decent annual growth pace. While nonregulated lending at financial companies (+0.4%), securitized pools (-4%), and nonfinancial businesses (+0.4%) is barely zero, or falling over the year.

One report (H.8) shows that consumer credit is still growing at a healthy rate, while another report (G19) shows that revolving credit has decreased for two consecutive months. The G19 better describes consumer lending conditions in a quickly contracting economy.

There are some targeted measures, like the Term Asset Backed Securities Loan Facility (TALF) that will help to improve the overall balance sheet of all financial institutions; but the bulk of the lending facilities are targeted at the commercial bank system's aggregate balance sheet, as listed in the H.8 release. However, the stock of consumer credit outstanding, $2.6 trillion, is three times the size of the consumer credit extended by the commercial banking system, $0.872 trillion.

The chart illustrates the share of total outstanding consumer credit by type of institution. The share of extended credit by the commercial banking system has fallen from 47% of total lending in 1989 to 33.6% in December 2008. On the other hand, the share of lending flowing through the securitized industry has increased from just 4% in 1989 to 25.3% in December 2008. So there you have it: it is the market that has fallen flat - the securitized asset market - that is dragging down consumer lending; and not the commercial banking system, which has been propped up by policy.

This analysis reveals the importance of the securitized industry in credit markets that matter for consumers. The Fed's liquidity measures can only do so much; they can pump up reserves in the commercial banking system to keep lending positive. But it is the securitized industry that has fallen down, and dragging with it, lending rates, which is why policy must target this market specifically.

Rebecca Wilder


  1. That's a really interesting analysis Rebecca. The other side of that argument would be, I think, that the commercial banks do actually have the potential to pick up the slack of the securitized industry.

    If commercial banks reverted tomorrow to their '89 share of today's $2.6T outstanding consumer credit (47%), it would require them to increase their lending by $350B. As you pointed out at the beginning of the post, commercial bank reserves are $652.9B higher today than they were one year ago.

    That being said, having the means is one thing, and using them in such a focused manner is another. So the point of your analysis is well taken.

    Also interesting (and maybe the topic of a future post?) was the large decrease in commercial bank reserves at the Fed this week, dropping by over $93.4B in just seven days. And that coincident with speculation about Geithner's bank bailout and a rally in most asset classes.

    From a 1-3 month trading perspective, I think we're witnessing the start of a meaningful bear market rally. During the past months, this blog has shown lots of evidence that the global economy still has a very long road to recovery - such insights make a good case for eventually selling/shorting any rally.

  2. Hi Dan,

    Your point is well taken, too. The numbers do indicate that a sharp turnaround is possible, but logistically I am not so sure. Banks would have to raise their balance sheets and assume a lot of risk that was previously spread throughout the financial industry overall. Bankers are unlikely to do this in the middle of a recession. Will tackle the Fed balance sheet tom., but it does not show around $63 billion in MBS that has been purchased to date that will settle in the future.

    Thanks! Rebecca

  3. The banks vs. the non-banks.
    Financial intermediaries (non-banks) lend existing money which has been SAVED, and all of these savings originate OUTSIDE the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create NEW money in the lending process.

    The last period of dis-intermediation for the commercial banks was in the Great Depression. However the non-banks have suffered many boom bust cycles (disintermediation).

    Now, the non-banks are contracting. I.e., non-bank participation in insurance, pensions, mutual, money market, and hedge funds, loans, credits, and securities, etc. is shrinking; some might say deleveraging.

    The fallout is demonstrated by the FED giving investment banks access to the discount window.

    The growth of the financial intermediaries or non-banks cannot be at the expense of the com. banks. So the FED should impose REG Q interest rate ceilings on the money creating depository institutions and gradually get them out of the savings business. (i.e., lower existing rates on customer deposits, but not on the non-banks).

    This would redistribute the flow-of-funds. It would increase the supply of loan-funds in the long-term markets. It would decrease long-term interest rates in the process.

    This would enable more home owners to refinance at lower rates and would make new home purchases more affordable.

    It would stimulate real-gdp & increase employment, in other words, it would match savings with investment. I.e., it would reverse the implosion of the non-banks.

  4. If Paul Volcker had a brain consumers wouldn't be confronted with usurious interest rates (i.e., credit card, payday loans, etc.). And now he is the leader of the Economic Recovery Advisory Board for Obama? It's a bad joke.

    Volcker's ignorance on the impact of borrowed vs. non-borrowed reserves in the period from oct 79until the end of 83(there is no economic difference) FORCED the elimination of consumer protection and punitive rates of borrowing by consumers.

    Establishing usury ceilings would be another economic stimulus (one not involving the Treasury or Federal Reserve).

  5. But we live in a predatory society and the bankers will preempt the field.