Elizabeth Duke has given an excellent speech on recent bank lending trends in US . Being a former banker, she knows how should one analyse bank lending especially in these troubled times.
She gives three ways in which one can analyse bank lending:
1) macroeconomic view – When looking at aggregate borrowing, it is important to remember that a change in debt outstanding can be driven by any one of three factors or, more commonly, a combination of all three. In the macroeconomic view of credit, I will discuss indicators related to changes in demand for credit. I will also examine two determinants of the supply of credit. The first determinant relates to lenders’ assessment of the creditworthiness of borrowers given future economic conditions. The second relates to credit constraints caused by the financial condition of the lenders.
2)financial intermediation view : illustrates the importance of supporting the availability of all forms of lending, whether it be on-balance-sheet lending by banks, credit originated by banks and securitized and sold to investors, or credit supplied by nonbank lenders.
3) banking view: Because banks remain central to financial intermediation, they deserve a closer look, particularly during this time of financial-sector turmoil. In my discussion of the “banking view” of credit, I will summarize the current state of the banking industry.
She then looks into each of the views. I would have loved to analyse the speech in detail but time does not permit. The summary is:
The macroeconomic view of credit highlighted the importance for the flow of credit of reduced demand due to weaker economic activity, reduced supply because borrowers appear less creditworthy, and reduced supply because lenders face pressures that restrain them from extending credit
The financial intermediation view of credit highlighted that banks have remained important financial intermediaries long after the originate-to-distribute model for funding credit became the dominant model and can play an important safety-valve role for the financial system.
Finally, the banking view of credit emphasized that there are many types of banks in the United States, and the extraordinary stress in the financial system, the downturn in the U.S. and global economies, and the associated reductions in asset values have affected each bank differently. As such, some banks have likely fulfilled the credit needs of consumers and businesses that had been turned away by their peers.
In the banking view she shows it is basically large banks that are not lending but small banks are.
I came across another paper from St Louis Fed economists which also look at whether banks are lending or not in the crisis. It has pretty similar findings with credit crunch coming in Q4 2008 with small banks still going strong.
We show that credit expansion, as defined in this paper, began declining during the first half of 2008 while credit contraction began steeply increasing only between the third and fourth quarters of 2008. Until then net credit growth was below trend but positive and not dissimilar to the 1980 and 2001 recessions. However, between the third and fourth quarter credit contraction grew larger than credit expansion across all types of loans (real estate, individual, commercial, and industrial loans) and for the largest banks. On the contrary, smaller banks continued to display positive net credit growth. Once we include 2008:Q4 data, the cyclical properties of our series most resemble the beginning of the 1991 recession and the intensification of the Savings and Loan crisis.