Wednesday, September 23, 2009

Commercial Lending by US Banks Steadily Declining Throughout 2009

After several years of double-digit growth in commercial lending, as of the 6/30/09 FDIC Call Reports, outstanding balances across major commercial loan types are collectively down 5.3%. Both commercial & industrial (C&I) and construction & land development balances are down about 9%. Surprisingly, commercial real estate (CRE) is up 2% for the first 6 months of 2009. Slide 1 shows outstanding balances from 2003 through 6/30/09. (double click on picture to enlarge slide)

FDIC call report data is only available quarterly. In order to examine month-to-month trends in commercial lending, you need to look at estimated data from the Federal Reserve’s weekly sampling of 875 commercial banks for C&I and CRE outstanding balances. The Fed’s data shows a slightly different picture. As shown in Slide 2, C&I and CRE balances have steadily declined every month in 2009, with an overall decline of 6.8% as of 9/8/09.

According to the FRB July 2009 Senior Loan Officer Opinion Survey, declining loan demand and deteriorating credit quality are behind the steady reduction in commercial and industrial lending across firms of all sizes. In response to deteriorating credit quality, banks are subjecting small, medium and large businesses to tougher lending standards and higher interest rate spreads. The banks surveyed said they expect lending standards across all loan categories would remain tighter than average until the second half of 2010. As shown in Slide 3, a bright spot in the survey is a lessening of banks tightening lending standards after a peak in November 2008 along with a slight improvement in loan demand.

The next posting will discuss similar trends in Canada and the Euro Area.

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