Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

Meet the Author

James B. Thomson |

Author

James B. Thomson

James Thomson is a former vice president and financial economist in the Research Department of the Federal Reserve Bank of Cleveland. He retired in February 2013.

03.23.11

Economic Trends

Bank Lending

Matthew Koepke and James B. Thomson

It has been nearly two years since the National Bureau of Economic Research called an end to the recession, but concerns still remain about the strength of the recovery in bank lending. The most recent data from the FDIC suggest that while some measures of credit flow are improving, other measures continue to show weakness.

According to the FDIC, assets of all FDIC-insured institutions grew at an average rate of 8.1 percent from 2000 to 2008, with annual growth ranging from 5.4 percent in 2001 to 11.4 percent 2004. The banking system recorded two strong years of asset growth in 2006 and 2007, increasing 9.0 and 9.9 percent in those years before slowing to 6.2 percent growth in 2008. In 2009, bank assets of FDIC-insured institutions declined 5.4 percent to $13.1 trillion. Since then, asset growth has ticked up in 2010 to 1.8 percent, but it remains well below the average growth rate of 8.1 percent seen from 2000 to 2008.

Total bank assets, by themselves, do not completely explain credit flows. Over the past decade, lending, on average, accounted for 58.1 percent of total assets (lending consists of net loans and leases). Consequently, changes in bank assets may not fully reflect changes in bank credit.

Growth in net loans and leases has followed a similar pattern to growth in total assets. From 2000 to 2007, net loans and leases grew on average 8.1 percent. However, loans and leases started to decline earlier than total assets, declining 1.3 percent in 2008, while total assets grew 6.2 percent. Net loans and leases continued to decline in 2009 (8.4 percent). In 2010 they began to increase (1.3 percent) again, although the growth in lending still remains below the average growth rate of 7.1 percent seen over the last decade.

Commercial and industrial loans (C&I) and commercial real estate loans (CRE) are important sources of credit to businesses, particularly to small and medium size businesses. Consequently, growth in C&I and CRE lending will be essential for economic recovery. From 2000 to 2008, C&I loans grew, on average, 4.9 percent; however, C&I lending fell 18.2 percent and 2.9 percent in 2009 and 2010, respectively. While CRE loans have fared much better than C&I loans, signs of weakness in CRE lending persist. CRE loans increased 2.3 percent in 2009 but have declined 1.9 percent in 2010. As a result of weakness in C&I and CRE lending, total commercial credit growth has trailed growth in net loans and leases through the economic recovery.

On-balance-sheet measures, such as total assets and net loan and leases, can be used to describe a bank’s credit channel; however, on-balance sheet measures may not describe all of a the credit facilitated by a bank, as some forms of credit do not appear on the balance sheet and some loans have been taken off the balance sheet.

Bank lines of credit are a form of short-term financing used by business customers of all sizes. They can be segmented into uncommitted lines of credit, committed lines of credit, and revolving credit facilities. Bank lines of credit serve as an additional source of financing and help companies and help companies obtain short-term funds at stable rates. Letters of credit are irrevocable guarantees from a bank that allow businesses to obtain additional forms of financing, such as trade credit from a supplier.

Both undrawn lines of credit and letters of credit represent an off-balance-sheet form of credit availability, but neither result in an on-balance-sheet asset when it is created. Credit lines become an on-balance-sheet asset only after they are drawn on, and a letter of credit only if a bank takes over the loan backed by the letter.

Banks also sell or securitize a number of loans they make, causing on-balance-sheet loans to understate the amount of credit being intermediated.

While net loans and leases have increased, off-balance sheet forms of credit have continued to decline through the economic recovery.

On-balance-sheet credit channels have improved, but their growth has been very slow; moreover, off-balance-sheet credit channels have continued to decline. Consequently, comprehensive measures of credit have fallen through the economic recovery.

Commercial credit facilitated by the banking system measures the on-balance sheet business loans and off-balance sheet commercial credit facilities. Total bank credit activities measures net loans and leases that are on the balance sheet and credit facilities that are off-balance-sheet. Given the small increases in net loans and leases and the continued weakness in off-balance-sheet credit channels, both commercial credit facilitated and total credit facilities have struggled to recover. Commercial credit facilitated fell 9.6 percent and 3.5 percent in 2009 and 2010, while total bank credit facilities fell 13.8 and 4.3 percent over the same period.