Banks lending belied by $10 trillion hoard: Fed
For all the warnings from the Federal Reserve over excessive risk-taking as loan growth soars to levels last seen just before the crisis, bankers still have 10 trillion reasons to lend.
That's the dollar amount that banks hold in deposits in the US, which exceeded the value of all loans by a record $2.5 trillion last month.
Banks are amassing more cash even as lending to U.S. companies this quarter is poised to increase by the most since 2007, according to data compiled by the Fed.
The lending surge reflects confidence among the nation's banks to extend credit as the Fed scales back its monetary support of the US economy, while the cash cushion may temper the concerns of regulators who in recent months have warned that excess-
Pes may be emerging in riskier parts of the loan markets.
Seven years ago, when banks were lending at a faster pace, the amount that was lent outstripped cash deposits. "Banks are not exhibiting anywhere close to the kind of excess we saw leading up to the crisis despite the growth in loans," John Lonski, the chief economist at Moody's Capital Markets Research Group, said in an interview from New York. "They have a lot of lending capacity and they believe business conditions will remain good enough that borrowers will be able to meet their obligations."
Cash deposited at banks increased to the record level through the week ended March 12, compared with loan assets of $7.5 trillion, the Fed data showed. This is a reversal from October 2008 when loans exceeded deposits by $205 billion.
The $68 billion jump in commercial and industrial loans made by banks to U.S. companies brings corporate borrowings to $1.67 trillion.
Known in the industry as C&I loans, they are one of the major components of the "loans and leases" that banks report. Other borrowings include those secured by real estate and debt extended to individuals such as credit cards. The expansion of C&I loans by $38.3 billion in February was also the biggest monthly increase since 2008.
"That is a level we haven't seen since the boom years," Mariarosa Verde, an analyst at Fitch Ratings, said in a telephone interview from New York. "The economy runs on credit and it's good for that."
The U.S. economy grew more in the fourth quarter than previously estimated, according to figures from the Commerce Department released yesterday in Washington.
Gross domestic product grew at a 2.6 percent annualized rate from October through December, more than the 2.4 percent gain reported last month, the figures showed, buoyed by consumer spending climbing by the most in three years.
Initial jobless claims fell 10,000 to 311,000 in the period ended March 22, the fewest since late November, according to Labor Department data released yesterday in Washington.
The Fed has reduced its monthly purchases of Treasuries and mortgage-backed bonds by a combined $10 billion in each of three policy meetings to the current level of $55 billion and said it will cut back on buying through future meetings, according to a statement last week.
Fed officials also moved up their projections for when the bank will lift its benchmark rate, which has been close to zero since 2008, to 1 percent by the end of 2015. Banks have been willing to lend more as the number of borrowers who fail to meet their obligations has declined.
The proportion of loans on which borrowers failed to make timely payments dropped to an all-time low of 0.87 percent in December, the least in quarterly data from the Fed going back to 1987.
Banks eased their lending policies for C&I loans to companies of all sizes as demand increased, according to the Fed's last senior loan officer opinion survey on lending practices in January. The lowering of standards included cutting spreads on C&I loan rates, reducing the cost of credit lines, decreasing the use of interest rate floors and easing covenants, the survey showed. The decline in quality has prompted warnings from regulators. Last year, the Fed and the Office of the Comptroller of the Currency told some of the biggest banks to improve underwriting standards for non-investment-grade or leveraged loans. The amount of speculative-grade or leveraged-loans made last year in the U.S. exceeded $1 trillion, the most on record, according to data compiled by Bloomberg.
"Lending competition is increasing and that needs careful monitoring," Verde said. Debt-underwriting revenue at eight of the largest U.S. and European investment banks, including JPMorgan Chase & Co. and Deutsche Bank AG, rose 9.1 percent to about $18.7 billion in 2013, according to Bloomberg Industries. That was the highest total since at least 2008. Much of the increase last year was driven by high-yield lending, according to an annual report from Coalition Ltd., an industry-analytics firm, in February.