The Wall Street Journal
One of the great mysteries and biggest concerns in the economy right now is the slowing growth in bank lending. Economists are searching for answers but none are entirely satisfying.
Total loans and leases extended by commercial banks in the U.S. this year were up just 3.8% from a year earlier as of March 29, according to the latest Federal Reserve data. That compares with 6.4% growth in all of last year, and a 7.6% pace as of late October.
The slowdown is more surprising given the rise in business and consumer confidence since the election. And it is worrisome because the lack of business investment is considered an important reason why economic growth has remained weak.
Loans to businesses have slowed most sharply, with the latest data showing commercial and industrial loans up just 2.8% from a year earlier, compared with 8.9% growth in late October. Economists at Goldman Sachs estimate the slowdown in commercial and industrial lending alone equates to a $100 billion shortfall in loans.
Investors may start to get more clarity on what is causing the slowdown when banks start reporting first-quarter earnings on Thursday.
One explanation is that many companies have been tapping corporate bond markets to lock in low rates, and in some cases to pay down more expensive bank debt. In the first quarter of this year, corporate bond issuance rose by 18% from a year earlier, according to the Securities Industry and Financial Markets Association. But one reason for the increase is that the first quarter of 2016 was dismal because of market turmoil. The rise isn't enough to explain the entire shortfall in lending.
Goldman's economists also point to dynamics in the oil-and-gas industry. When oil prices were falling sharply in the first quarter of 2016, many energy companies couldn't tap capital markets for financing. Instead they drew on bank lines of credit. Now that oil prices have rebounded, many of these companies are paying down their bank lines, Goldman says.
As the Goldman economists admit, this hypothesis is hard to verify since the Federal Reserve lending data aren't broken down by industry. Using data from the Office of the Comptroller of the Currency on the total size of credit facilities, they assume commodities companies borrowed around one-third of loan commitments available to them by March last year, then paid down around 35% of that balance over the rest of the year. They figure this would account for roughly the entire $100 billion shortfall in C&I lending.
But Goldman's figures are very rough estimates, and others are skeptical. Paul Ashworth, an economist at research firm Capital Economics, says the oil-industry thesis doesn't explain why there was such a sudden deceleration starting in November. Moreover, he notes that lending has slowed across the board, not just in C&I but also in mortgages, consumer loans and commercial real estate. Strikingly, loans by U.S. branches of foreign banks have fallen by $85 billion since the end of October, and now account for $871 billion of loans outstanding.
Political uncertainty may be one cause. Consumers and businesses have shown greater confidence since the election, but with major policy changes in taxes, trade and healthcare still in limbo, they might want more clarity before they take out big loans for new projects.
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This article was licensed through Dow Jones Direct.
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