The conventional wisdom in the market seems to be that banks aren't lending, but the evidence suggests that so far we have not seen the drops in lending that characterized previous recessions. This is probably due to new capital received from the government, and political pressure from the White House and Congress.
The issue of whether banks are lending is important because no matter how low the Federal Reserve drives rates down, it won't matter without banks extending credit. Data from previous recessions also show that historically, using the last nine recessions as a guide, private sector lending per quarter has contracted 30% on average from peak to trough.
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The answer to the question of whether banks are lending becomes a little easier to discover thanks to the Obama Administration, which has demanded more transparency on what the banks are doing with government money obtained through the Capital Purchase Program (CPP), which came out of the Troubled Asset Relief Plan (TARP) originally initiated by former President Bush. (To learn more about the TARP, be sure to check out our related article Liquidity And Toxicity: Will TARP Fix The Financial System?)
As part of this transparency, the U.S. Treasury just released the first monthly Bank Lending Survey. This is a comprehensive survey of many of the largest banks and what is occurring in regard to lending in all different categories, including commercial and industrial, commercial real estate and residential mortgage lending.
Bank Lending Survey Results
JP Morgan (NYSE:JPM) originated $50 billion in consumer loans across all categories, including credit cards, autos and mortgages in the quarter. Small- and mid-sized businesses saw $20 billion in new credit.
Wells Fargo (NYSE:WFC) reported that average consumer loans in the fourth quarter increased by 4% year over year. In its report, Wells Fargo made a point of saying that new lending in the quarter amounted to $75 billion, which is three times what the bank received as a TARP investment from the government.
USB Bancorp (NYSE:USB) saw its average loan and lease balance increase by 3.1% excluding acquisitions in Q4 2008.
BB&T (NYSE:BBT) said that it originated 215,000 business and consumer loans totaling $15 billion in the Q4.
Pressure From The Federal Government
One reason that lending has not contracted yet is due to public pressure from the White House and Congress. The CEOs of every major bank were grilled about lending practices in public hearings several weeks ago. President Obama has also made several comments on lending during speeches and press conferences.
Other data from the government also seems to be inconsistent with the conventional wisdom out in the market on loan growth. The Federal Reserve Bank of St. Louis puts out a monthly series of data on growth in different loan categories, and none of them so far are showing a large drop in lending.
No Lending Contraction Yet
The new monthly report from the government shows that a contraction in overall lending has not yet occurred, despite the conventional wisdom that is circulating in the markets. Political pressure and a generous U.S. Treasury are probably responsible for keeping the funds flowing.
To make your own comparisons between this and previous recessions, read A Review Of Past Recessions.