Friday, May 14, 2010

2009 Commercial and Industrial Lending Trends at Large and Mid/Small Banks

I decided this blog would be a good place to take on answering more questions. This week a compare and contrast request about what's been going on in commercial and industrial lending and how reactions to market pressures in 2009 affected the large and small strata of the banking industry.

Here’s my take on it:

During 2009, C&I loans outstanding by large institutions declined from $1,200B to $953B between 12/2008 and 12/2009 confirming the Federal Reserve’s observation of a 20% contraction in lending. Of note, this shrinkage is equal in magnitude to the lending of the entire mid and small bank lending base. During the same period, the under $10B asset banks went from $310.8B to $281B in C&I loans outstanding, an estimated contraction of only 9.5% based on an IRA examination of the universe of FDIC CALL/TFR Reports from the period. On the surface that would seem to single out the big banks as being the sole culprits of diminishing credit availability in the U.S. That’s not quite true and here’s why.

Another important part of the credit availability story for U.S. business in 2009 reveals itself more clearly if one looks at unused commitments for C&I Lines of Credit (LOC). During 2009, large bank C&I LOC commitments went from $46.7B up to $49.8B for the year even as their annualized gross experience factors tripled from 113.1bp at the beginning of the year up to 294.9bp by December. Granted the terms demanded by these big banks became more onerous. However on the mid/small bank side of the industry, credit availability completely collapsed in 2009. LOC commitments for these banks plummeted from $17.3B at the beginning of the year to $8.8B by year end. For them, gross defaults only doubled going from 98.9bp to 218bp for the year but it still resulted in a more severe commitments contraction.

The real question then is what’s behind the disparity in reaction patterns to what I personally believe are actually two parallel sub-groups within a larger complex industry?

Smaller banks don’t have the reserves depth of their larger counterparts so their reaction to systemic stress is to pull back from risk taking. They embark on a flight to quality and that ultimately results in fewer, but not that much fewer, loans and tighter limits on commitments to lines of credit. Borrowers are faced with the task of overcoming much higher acceptance standards.

Big banks, who had been far more liberal in their lending when winning market share was the mission at all costs, begin to cull their lower quality loans under the pressure of improving operating risk management. They can then draw on government subsidies and use them to issue new loans on more onerous terms because portfolio theory dictates they need these higher terms to recoup the loan quality mistakes now manifesting as higher default rates. To attract customers, they grant somewhat more liberal lines of credit that are of course shrouded in covenants designed to make actually trying to use these lines an obstacle course. That’s what’s meant by “loss management” strategy.

The net result from these independent parallel responses to the common systemic shock? U.S. commercial industry is more difficult and costly to conduct.

Here are the reference data links:

Large Bank C&I

Mid/Small Bank C&I


  1. HI Dennis and Chris, what you're observing with C&I lending is confirming that US compliance with G20 is to collapse our own economy.

    If management has been buying congress with campaign contributions to strike anti constitutional (non tariff'd trade violates Article 1 Section 8 of the US Constitution) ie 'free' trade agreements while running the difference between paying americans and paying cheap foreign labor-lining its own pockets with these 'saves' they're run thru the income statement, 1. do you think it's going to be a great domestic market to lend into 2. what banks are going to go against the grain of the BigFinancials that are in bed with the Germans and the G20 and continue to grow our economy here by lending into our production/industrial base.

    If it's to be contracted while we're in these agreements, that in effect are economic treason, unless people decide to get an elephant gun and shoot the elephant in the room and decide we're not like the europeans and have a society with the concentration and ways of hiving away the wealth from the hands of the many into the hands of a few... using any means, feudalistic-colonialistic - corporate abusive ways -central banking and the cartel that controls it or otherwise, we're going to see this sort of banking activity. Investors dont have to support it. buy ? not even savings is safe any more because the Fed inflating the money supply 3% every year anyway but as Chris has said printing money so that the Maiden lanes are bailed out and give appearances of turning profits, we're looking at the Old World and the concentration of wealth into the hands of a few. Contracting production is a way this has been being achieved. The C&I lending reflects this sad state of affairs.