Why U.S. Banks Aren't Lending

The Fed has released its latest quarterly Senior Loan Officer survey, which takes the pulse of bank lending around the country. It's an uneven, thready pulse: things are improving, but in spite of the TARP, TALF and the other programs that injected billions into the banking system, a significant proportion of banks report that they are making credit increasingly expensive and hard-to-get. More disappointing for the near-term prospect for economic growth is that corporations and consumers don't seem to want to borrow.

The Federal Reserve conducts a recurring survey of lending conditions in the U.S., currently reaching out to 54 banks every quarter, 30 large and 24 "other," and asks a lot of questions about how their lending activity in a given quarter compares to the quarter before.

The results are another example of the "less bad" news we've been seeing for months, but when it comes from banks, it's especially potent: the system depends heavily on the availability of credit to get out of bed every morning.

There are three categories of borrowers - commercial and industrial ("C&I"), commercial real estate ("CRE"), and consumer. Here are some of the highlights:

C&I: About one-third of banks have tightened their lending standards in the last three months, while about two-thirds haven't changed them. Over half have increased borrowing rates, even though the cost of corporate credit in the bond market is way down. What happened to the green shoots?

As the Fed explains:

The predominant reasons that banks gave for tightening credit standards or terms for C&I loans resembled those reported in the previous two surveys. Both domestic and foreign respondents nearly unanimously cited a less favorable or more uncertain economic outlook, and large majorities cited a reduced tolerance for risk. Domestic respondents also widely noted a worsening of industry-specific problems...

Foreign and domestic respondents that reported weaker demand unanimously cited their customers' decreased financing needs for investment in plant or equipment as a reason for weaker demand for C&I loans over the past three months. The other predominant reasons for weaker demand included decreased needs to finance inventories, accounts receivable, and mergers or acquisitions. On net, about 25 percent of domestic banks reported that inquiries from potential business borrowers had declined during the survey period..

As for consumer lending, the prime mortgage is market is much better, with only about 20 percent of banks reporting tighter lending. But for subprime loans, home equity lines, and credit cards, about a third of banks are tougher with customers now than they were the previous quarter.

The sublime bank-intensive blogger Calculated Risk shows us that the banks may have a point, citing a Fed chargeoff report:

Commercial real estate delinquencies (7.91%) are rising rapidly, and are at the highest rate since the early '90s (as delinquency rates declined following the S&L crisis)...
Residential real estate (8.84%) and consumer credit card (6.7%) delinquencies are at the highest levels since the Fed started tracking the data (since Q1 '91)...
Although there is credit deterioration everywhere, the rise in these three categories is especially significant... These are the loans that will lead to the closure of many more regional banks.

The net result: shrinking bank lending. As of August 5, the Fed reports aggregate bank loans of $6.9 trillion, down from $7.2 trillion in January, and about equal to loans at July 2008. C&I and consumer loans are down eight percent from January, and consumer loans are down three percent. Real estate loans, including home mortgages, are up, but less than one percent.

I appreciate that the managers of banks have to walk a tightrope: the Fed wants them to keep their balance sheets clean, and they have to protect their shareholders. But U.S. taxpayers just waged the biggest battle since WWII to keep them, and the rest of the economy, from slipping away. When are these guys going to start lending again?