Dennis Santiago – CEO and Managing Director of Institutional Risk Analytics (Chris Whalen’s company) – notes:
The really shocking numbers are in the unused line of credit commitments of banks to U.S. business. This is the canary number I like to look at because it is a direct expression of banking and finance confidence in Main Street industry. It’s gone from $92 billion in Dec -2007 to just $24 billion as of Sep-2010. More importantly, the vast majority of this contraction of credit availability to American industry has been by the larger banks, C&I LOC from $87B down to $18.8B by the institutions with assets over $10B. Poof!
This once again confirms what I have been saying for years: the giant banks are causing most of the credit contraction.
As I wrote in 2009:
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” says Christine Barry, Aite’s research director. “They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
I showed in January 2010 that part of the reason small banks are loaning more than big banks is that – while small banks still focus on traditional banking – very little of the big banks’ business these days is from traditional banking functions. For example, far less than one-tenth of Bank of America’s overall assets come from traditional banking functions.
I reported last March:
Thomas M. Hoenig – president of the Federal Reserve Bank of Kansas City and the current longest-serving regional Fed chief – said in a speech at a U.S. Chamber of Commerce summit in Washington:
During the recent financial crisis, losses quickly depleted the capital of these large, over-leveraged companies. As expected, these firms were rescued using government funds from the Troubled Asset Relief Program (TARP). The result was an immediate reduction in lending to Main Street, as the financial institutions tried to rebuild their capital. Although these institutions have raised substantial amounts of new capital, much of it has been used to repay the TARP funds instead of supporting new lending.
On the other hand, Hoenig pointed out:
In 2009, 45 percent of banks with assets under $1 billion increased their business lending.
45% is about 45% more than the amount of increased lending by the too big to fails.
And I noted last April:
USA Today points out:
Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid, a USA TODAY/American University review found.
• Lending fell. The amount of loans outstanding to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009, at banks that participated in TARP compared with a 6.2% drop at banks that didn’t.
Break up the big banks, so the smaller banks have room to grow and lend more.
“This once again confirms what I have been saying for years: the giant banks are causing most of the credit contraction.”
So what? The solution to too much debt is not more debt (no matter what krugman or anyone else says).
“As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…”
Last time I heard sales were the biggest small business problem. Maybe they don’t need to expand?
Even if they do need to expand, let them do it from earnings (in the present). That way the economy doesn’t need to worry about debt defaults (in the future).
It seems to me that somewhere in the back of your mind you think this is some sort of not enough supply problem. At first glance and other than cheap oil, I can’t think of much that is in short supply.
I think the point of the post is that the main rationale given for the very existence of the big banks, as well as for the Bailout itself (“to get the banks lending again”), is a fraud.
The takeaway from the post isn’t that we should force the big banks to lend more, but that we should eradicate them completely, since their existence serves no purpose at all and is purely destructive.
Exactly, I think Fed Up misses the point. A significant impetus behind the TBTF bailout was to restore business lending. In reality, the bailout has gone towards extravagant salaries and rebuilding capital cushions.
“Exactly, I think Fed Up misses the point. A significant impetus behind the TBTF bailout was to restore business lending. In reality, the bailout has gone towards extravagant salaries and rebuilding capital cushions.”
And do the fed and the idiots in congress believe that the bankers and their bondholders need to get richer or they will say we won’t do any new lending and/or raise interest rates on bank capital?
Let’s assume no new debt defaults and that no new debt is created. What happens to the amount of medium of exchange and then other things in the economy?
“I think the point of the post is that the main rationale given for the very existence of the big banks, as well as for the Bailout itself (”to get the banks lending again”), is a fraud.”
Do we need to get any banks lending again? Why should all new medium of exchange be debt (have an interest rate and repayment terms attached along with bringing something forward from the future)? Why can’t new medium of exchange be currency?
@Fed Up Says ” The solution to too much debt is not more debt”
Nicole Foss over at TheAutomaticEarth.blogspot.com has been saying that for some time. To me, the question though is balancing the write down of all this debt while we create new wealth.
Congress, when it gave a blanket approval to the original TARP loan ( and then the Federal Reserve took the bit in its mouth and ran away with 10 times the original allotment) caused a huge problem by putting on a show of ‘bailing’ out the banks while everyone knew it was really a life preserver for the top echelon of these monster so called TBTF whatever the F… they were-certainly to call them banks is to place a huge slur on that term. It’s like the college kid who can’t face up to doing his laundry so he mail orders new clothes for the whole semester and comes away from a bigger and bigger pile of dirty laundry looking like dapper and smart; something from the pages of Esquire. Down the road the family does an intervention and sells off or launders 800 lbs of clothes.
But who will do the dirty laundry of these TBRF creatures who have how many trillion pounds of smelly socks and unders to hang out?
Meanwhile we do need to create new debt that will be used to create more jobs INSIDE the shores of this country. Will we actually make this kind of distinction in WHAT ends the debt is used for?
Something else just occurred to me as I was ruminating over the idea of what kind of debt we have burdened ourselves with and trying to establish what kind of debt is desirable and how and by whom those decisions would need to be made– the financial sector, the Fed, the Treasury, Congress, to guide the nation towards safer economic shores.
Creating new wealth can only be done if interest rates for investors -particularly the small investor who has about $10-100k to run with and is desperately seeking to find a place to put the money without creating debt (not looking at buying a house or buying designer jewelry or art objects)-will attract numbers of people who will ban together to build factories that employ people with jobs that pay living wages (28k+/year)so we can end this crazy ring around the posey all fall down game: Get a loan for a huge house by removing money from savings and sinking it into more debt so that can be serviced with more payments which lowers the owners net worth so he/she has to borrow more on the credit cards which results in more service costs and so forth and so on, etc., etc., etc., ad infinitum. None of this creates wealth, so we pile up dept in an inverted pyramid on a small pillar of real physical wealth. Now the pyramid is about to topple over.
Some real constructive destruction has to take place to bring that pyramid down, meanwhile while the pieces are falling down around our ears, how to we put up umbrellas strong enough to protect us while we build anew?
I would really like to hear from some of the better versed writers about this subject of creating real wealth and writing down the current debt to show its true value in its actual relationship the the relatively small amount of real wealth the whole world actually has. Real wealth to me means physical objects that have value for resale.
@Fed Up Says ” The solution to too much debt is not more debt”
As I believe Krugman wrote in a recent *academic paper*, the solution is actually to change WHO is in debt. This is actually very well understood, and he’s got both a model and a lot of empirical evidence.
Lenient bankruptcies are one way to do it. Government borrowing which is transferred directly to individual citizens with low incomes and high debt is another way.
But right-wingers call it “wealth redistribution”, and we can’t get it done.
Fed, I think a lack of credit and a purpose for it has caused most of the credit contraction. I sense that smaller banks are making loans because they are receiving the excess reserves from the TBTF banks, who are using QE to avoid going to the market with doubtful credit, having to pay higher rates. Who would lend one of the TBTF banks money at zero, non-guaranteed?
One concern I have is, if the big banks aren’t conducting C & I lending; it’s likely they don’t consider it profitable. That may be because they don’t like the overhead that comes with managing large loan portfolios, when cheaper money can be made elsewhere.
Or it may be that in the current quasi-recessionary environment, the numbers don’t work, and the big banks, at least temporarily, have decided to restore some sanity to the underwriting process.
If the latter, then as smaller banks exploit the void left by the larger banks in an attempt to gain market share, they are at the same time increasing their risk.
I see very little, from an economic perspective, that convinces me businesses need borrowed funds to succeed, and that a rise out of recession will follow increased loans to businesses.
What businesses need right now is customers with money to spend. That ain’t happening soon.
The problem the small banks face is that the average consumer either can’t or won’t borrow money, so loan revenues are decreasing. At the same time, fee income is constrained by recent legislation. What’s left?
Residential real estate is clearly a non-starter. That leaves C & I. Where – conveniently – there is a sudden opportunity.
Should small banks take on too much risk and encounter problems, you can bet they won’t be bailed out – they’ll be bought out of receivership, for pennies on the dollar, by the TBTF’s.
Draw your own conclusions for the sudden lack of lending by the big banks. My money is on greater consolidation and fewer banks.
It is important to note that the credit squeeze preceded and was a causal factor in sales declines. B2B sales fell precipitously because businesses needed to hoard cash because they knew the dislocations in the banking sector imperiled their access to capital. It was not the only factor, final consumer sales dropped as well. But my observation on the ground is that the immediate and first order contraction was in business spending as a result of credit squeeze, then employment declines and consumer spending declines. Today the problem is a two year sales cycle. But what precipitated this is the financial system.
“But my observation on the ground is that the immediate and first order contraction was in business spending as a result of credit squeeze, then employment declines and consumer spending declines.”
My observation is that amount of debt defaults and collateral losses were greater than the amount of capital set aside for the actual (instead of anticipated) losses. This led to demand deposits being defaulted on meaning the amount of medium of exchange was falling. When the amount of medium of exchange starts falling, all kinds of things in the economy can start happening.
“The really shocking numbers are in the unused line of credit commitments of banks to U.S. business. This is the canary number I like to look at because it is a direct expression of banking and finance confidence in Main Street industry. It’s gone from $92 billion in Dec -2007 to just $24 billion as of Sep-2010.”
This guy needs to get his figures right. He makes it sound as though big banks only have $24 Bn of undrawn credit out to all of the U.S. business community. This is not so. I just worked on a Time Warner undrawn syndicated revolver for $5 Bn that closed this week, I can guarentee that this isn’t 20% of all the undrawn credit of all large U.S. banks. If he is only talking about small business C&I loans, he should make that clear.
A big part of the decline in undrawn facilities among medium to large businesses is the decline in reliance on commercial paper. Before, businesses would finance themselves with commercial paper and have undrawn revolving credits as backup in case they couldn’t roll the paper. After the A2/P2 CP panic during the financial crysis, a lot of lower rated CP issuers decided that they would instead use a funded bank line instead which means they didn’t need as large of a revolver.