Tuesday, April 21, 2009

Of course bank lending is stalling; home equity lines of credit pose a risk to consumer spending

The Wall Street Journal ran a story about reduced bank lending originating from those banks that received TARP monies. Frankly, I don't know what kind of response the WSJ was going for, but I know what mine was: of course bank lending is stalling. Amid the precipitous economic decline, loan origination would likely be much worse had the banks not received capital injections. And in looking at the data, I noticed that another shoe might drop on consumer spending: home equity lines of credit are surging.

The credit crunch is now very evident in the data.

The chart illustrates total commercial bank lending growth since 1950. Lending has stalled at a 2.2% annual growth rate in March 2009, falling 2.3% since its peak in October 2008. The unemployment rate is at 8.5% and expected to rise further, GDP is about to post its third consecutive decline, and the health of the banking system is still in question. It is very likely that annual lending growth would be negative by now and probably well below growth rates seen in previous credit crunch (circles in chart).

TARP monies and bank lending according to the WSJ:
According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.

The Journal's analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline.
The Treasury reports bank lending here (the WSJ's reference above), saying this about residential real estate lending in February:
Lending levels increased from January primarily in residential mortgage lending which was driven by attractive mortgage rates.
The Treasury data is outdated. Since the shadow banking system is all but dead right now, any loan origination is likely going through the commercial banking system, which is reported by the Fed here through March. The Fed's data tells a similar story as the Treasury report, that loan origination is down.

However, there is one exception: as of March, real estate lending is still rising slightly, but only because households are drawing on existing home equity lines of credit. I see this as another shoe to drop on consumer spending.

Credit crunch: firm lending is down

The chart illustrates monthly commercial and industrial lending by the commercial banks. Loan origination has decreased, and the annual growth rate slowed, substantially.

Credit crunch: consumer lending - revolving and non revolving - is dropping.

The chart illustrates monthly consumer lending. Consumers are reducing debt load by paying off credit cards and new loan origination (auto, student) is falling.

Next shoe to drop: households are increasingly drawing on revolving home equity lines of credit.

The chart illustrates lending on revolving home equity lines of credit (HELOC). Lending (blue line) is still rising through March at a 20% annual rate. Households are using these lines of credit (presumably) to finance consumption needs, and a 20% annual growth rate is likely unsustainable.

Eventually, the lines of credit will run dry; and households will be forced to cut back on spending, taking another leg down. Not shown here is non-revolving real estate lending, which is down 1.3% in March since its peak in January 2008.

The credit crunch is in full swing, and the TARP monies no doubt kept lending in positive territory for a while. Amid surging unemployment, ongoing economic uncertainty, and a banking crisis that has yet to be resolved, the growth in bank lending is, in my opinion, rather remarkable.

Rebecca Wilder


  1. Sorry, this is the first time I have posted and my comment went to the wrong post:

    Rebecca, thanks very much.

    Over and above what you say here, I suppose the fact that the savings rate is growing is also a negative for the economy in intermediate-term to get us out of the recession if it continues. Longer-term it is good. Household debt is supposedly over 100% of the GDP, so do you know that if paying down debt is considered savings?

    "The January U.S. personal savings rate hit 5%, according to new BEA figures today. That’s up from 3.9% savings rate last month and 0.1% a year ago. We’re now at levels last seen in the U.S. in 1993."

    I can´t tell you how much I appreciate your views.

    Ron S.

  2. The St. Louis proxy for "Bank Credit of All Commercial Banks" shows a similar deterioration in lending.

    But again, this is ex-post.

    Milton Friedman theorized that from the time the FED expanded the money supply, there existed "long and VARIABLE lags" between its injection, and its impact on nominal gdp.

    In reality, monetary flows (MVt) or aggregate demand have no such variation.


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