Meet the Author

Ben R. Craig |

Senior Economic Advisor

Ben R. Craig

Ben Craig is a senior economic advisor in the Research Department. His principal fields of activity are the economics of banking and international finance.

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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.


Economic Trends

Loans and Leases in Bank Credit

Ben R. Craig and Matthew Koepke

It has been two-and-a-half years since the National Bureau of Economic Research (NBER) declared that the severe recession that began in early 2007 had ended. Since then, the U.S. has endured such a slow recovery that many question if we are in a recovery at all.

One important measure of economic strength, loans and leases in bank credit, confirms that the current recovery has been relatively subdued compared to the recoveries after the 2001 and 1990 recessions. While loans and leases tend to be a lagging indicator (due to the time it takes for old loans to be paid off and for banks to reduce lending activity), balances in bank credit do serve as an important indicator of how quickly the general economy is growing and, more importantly, what areas of the economy are expanding.

Loans and leases in bank credit are recovering much more slowly during this recovery than they did in the previous two. One reason for the slower pace this time around is simply the fact that the most recent recession was more severe than the previous two. On a year-over-year basis, total loans and leases declined in the recent recession an average of 5.0 percent for 57 consecutive weeks. They fell a full 9.7 percent in October 2009. Additionally, on a year-over-year basis, they suffered a second significant dip in March 2011 and then continued to fall for an additional 25 weeks before recovering in September 2011. In comparison, total loans and leases fell only 0.2 percent on average in the 2001 recession on a year-over-year basis. In the 1990 recession, the decline in loans and leases was more prolonged (they fell 21 out of 26 weeks), but the declines were never more than 0.8 percent on a year-over-year basis.

Currently, loans and leases in bank credit remain below their level at the trough of the recession. Furthermore, the largest contributor to the current growth in total loans and leases is likely to be a one-time transfer of credit balances from off-balance-sheet accounts to on-balance-sheet accounts, which caused the level of consumer credit to increase 43.0 percent in March 2010 (week 40). Despite the one-time accounting change, 132 weeks after the recession trough, total balances of loans and leases in bank credit stand at 98.8 percent of their level at the recession trough. At the same point after the 1990 and 2001 recessions, total balances stood at 103 percent and 119 percent, respectively. However, while loan and lease balances have not grown as quickly as they have in past recoveries, they are following a similar trajectory as balances in the recovery after the 1990 recession.

It is interesting to note that balances in one loan category have grown faster during this recent recovery than in the two previous ones. Balances of commercial and industrial (C&I) loans 132 weeks after the recession trough stand at 92.6 percent of the recession trough level, which is approximately the same level as balances after the 1990 recession and significantly above the 84.8 percent level seen at the same point after the 2001 recession. This is despite the fact that C&I balances fell further after the recession trough of the 2007 recession (17.7 percent) than after the troughs of the 1990 recession (8.0 percent) or the 2001 recession (16.0 percent).

Also, while C&I lending fell by similar amounts in the 2001 and 2007 recessions, C&I lending fell faster after the 2007 recession, hitting bottom in week 67 versus week 128 after the 2001 recession. C&I balances began to increase much earlier in this recovery than in the previous two as well. In this recovery, they first increased around 70 weeks, while after the 1990 recession it was around 145 weeks, and after the 2001 recession it was around 125 weeks. The relatively strong performance in C&I lending likely reflects a rebalancing of bank loan portfolios away from real estate loans into C&I loans.

The rebalancing of portfolios is more apparent when examining changes in real estate loan balances since the recession trough. With the exception of a slight increase in November 2011, real estate balances—which include revolving home equity loans, closed-end mortgages, and commercial real estate loans—have declined monotonically and currently stand at 91.0 percent of their level at the recession trough. Comparatively, at the same point after the 2001 recession (132 weeks), balances of real estate loans were 1.4 times their recession trough level. So, while C&I loan balances are increasing more quickly than in past recessions, real estate loans, which grew explosively after the 2001 recession, remain stable to trending down. These two trends together suggest that banks may be using the current recovery to rebalance their loan portfolios toward higher levels of C&I loans and lower levels of real estate loans.