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Bank lending jump bodes well for US economy

Banks in the U.S. are issuing loans at the fastest rate in roughly four years, another sign the economic recovery is taking root. "The [banking] industry is now in a much better position to support the economy through expanded lending," said FDIC chief Martin Gruenberg on Tuesday in discussing the agency's latest quarterly report.

Loan balances rose more than $130 billion in the fourth quarter of 2011, up 1.8 percent over the previous period and the biggest increase since late 2007. Banks have now boosted lending for three consecutive quarters. Driving the latest pick-up is increased lending to businesses for construction and industrial projects. So-called C&I loans accounted for nearly half of the total growth in loans and leases during the quarter and have steadily risen over the last 18 months. Although lending was strongest among midsize companies, demand also grew among small businesses for the first time since early 2009.

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Renewed appetite for risk among modest-sized enterprises suggests that fears are receding that the economy is in danger of slipping back into recession. The pick-up in business lending also could benefit other sectors. "We're hopeful that's going to continue to increase and will actually expand to other kinds of credits," Gruenberg said.

The banking industry as a whole is continuing to recover, with lenders earning a combined $26.3 billion last quarter. Although that was down sequentially from roughly $35 billion, overall bank profits rose 23 percent over the year-ago period and were up 40 percent from 2010. The number of troubled banks also declined during the quarter, according to the FDIC.

Yet much of those profits are the result of banks reducing the reserves they set aside to offset bad loans. Many institutions are struggling to grow amid low interest rates and new federal caps on credit card and overdraft fees. Noninterest income for the industry -- a key measure of lender profitability -- fell 7 percent in the last quarter and net operating revenue declined more than 2 percent, to $162 billion. "Bank revenues have been flat in an environment of low interest rates and slack loan demand," Gruenberg said.

Other types of lending that banks have traditionally relied on to drive growth also remain weak. For example, loans for real estate construction and development fell nearly $15 billion, or 5.8 percent, continuing a four-year decline.

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