Bank Lending Big Government Style

The latest weekly read of “Total loans and Leases of all Commercial Banks” indicates that banks are pulling back lending at the fastest pace on record with total loans and leases declining 8.55% on an annual basis.

U.S. government securities at all commercial banks, on the other hand, are booming increasing 13.45% on a year-over-year basis.

This likely underscores a fundamental quirk of today’s commercial lending environment.

High rates of delinquency and default on business and consumer loans are working to tighten direct commercial lending overall while government sponsored lending activities, such as is carried out through Fannie, Freddie, Ginnie, Sallie and FHA, work to prop specific lines of lending.

Commercial banks are, in a sense, refusing to generally lend unless they have a government guarantee.

Further, with the latest aggressive round of government mortgage mitigation initiatives the risks associated to lending directly to households is likely becoming more uncertain.

Total Real Estate Lending Contracts!

As a further indication that we are currently experiencing reasonably unprecedented economic trends, the total of all real estate loans for all commercial banks has just registered its first nominal annual decline on record.

This is particularly notable given that the series stretches all the way back to 1947 and thus captures a host of trying economic times including eleven separate recessions.

October 2009 registered a 1.70% annual decline followed by a tepid 0.06% increase in November and then a 0.38% decline in December bringing the total real estate loans held by commercial banks to just over $3.80 trillion.

The following chart (click for full-screen dynamic version) plots real estate loans at all commercial banks since 1947 along with the annual percent change of real estate loans. The light yellow bands indicate U.S. recessions.

Aside from reduced demand, if you want to know what might be keeping banks on the sidelines tightfisted and unwilling to lend take a look at the following chart (click for full-screen dynamic version) that plots nonperforming total loans for all commercial banks.

Notice that as of Q3 2009 the nonperforming loan ratio reached 5.03%, the highest percentage of delinquent or nonaccrual loans to total loans seen in at least twenty years.

Commercial Real Estate Lending: Tight Standards and Weak Demand

Today, the Federal Reserve released their latest installment of the Senior Loan Officer Opinion Survey on Bank Lending Practices showing continued weakness for commercial real estate lending.

The net percentage of domestic respondents tightening standards for commercial real estate loans, representing the supply dynamics of CRE lending, declined slightly to a still elevated level of 27.3.

The net percentage of domestic respondents reporting stronger demand for commercial real estate loans, representing the demand dynamics of CRE lending, increased slightly to a still very weak -27.3.

As the report noted, CRE lending remains weak:

“Banks’ policies on CRE lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year. In addition, banks reported that they had tightened terms on CRE loans substantially over the past year…”