Monday, March 31, 2008

consumer lending slows - but it's not all bad - plus, fresh cash for banks

consumer lending has slowed to a crawl, though not in all categories, and lending on the whole has actually held up fairly well.

whereas consumer loans increased $65 billion, or 8.7%, in the year ended 1/9/08, consumer loans since that time have increased just $300 million. this is according to the fed's most recent weekly report on the assets and liabilities of the nation's commercial banks, which was released late friday. these figures do not include real estate loans or home equity loans, which have faired better.

for example, real estate loans have increased at a 4.6% pace since 1/9, although that pace is slower than the 6.2% pace of the previous year. home equity loans have actually accelerated, increasing at a 13.3% pace since 1/9, an increase of several-fold over the previous year.

for bank lending on the whole, loans and leases in bank credit, a category that includes commercial and industrial loans, real estate loans, consumer loans, home equity loans and loans to securities firms via reverse-repurchase agreements, has increased at a 12.9% pace since the end of 7/07, an acceleration from the 9.8% of the previous 12 months.

switching gears, commercial banks took in $44 billion in deposits in the week ended 3/19/08, following an inflow of $82 billion the previous two weeks, bringing cumulative increases since 7/07 to $546 billion. these deposits will help give banks the capacity to make new loans. in addition to these data, data on money supply growth and the monetary base have also quickened, indicating that the fed's rate cuts are beginning to sow the seeds for a pick-up in credit expansion.

deposit balances, which include transaction deposits, certificates of deposits (CDs), and savings deposits, fund about 60% of bank assets. this obviously means that banks are very dependent upon deposits as a source of funding and banks certainly need funding these days.

big increases in bank deposits will go a long way toward helping banks handle the many assets they have been forced to absorb onto their balance sheets in recent months, making recent developments especially important. at some point, bank deposits will grow more than enough to both absorb assets and facilitate new lending.

savings deposits have grown sharply over the past decade as a source of funding for commercial banks, representing about 42% of deposits today compared to about 30% a decade ago. it is a relatively cheap source of funding and a stable one.

although the fed's interest-rate cuts might seem to threaten the growth in bank deposits, it is notable that when the fed cut interest rates substantially in 2001 through 2003, bank deposits continued to grow at a double-digit pace, a faster pace than in the several years prior. that was partly because of the increase in risk aversion that occurred following the bursting of the financial bubble, which obviously is a phenomenon that looks likely to influence bank deposits in the time ahead -- good news for capital-starved banks.

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