Banks lend­ing be­lied by $10 tril­lion hoard: Fed

The Pak Banker - - COMPANIES/BOSS -

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.

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