Banks Stopped Lending?
There are lots of talk about banks stopped lending and how to make banks to lend again. The WSJ had an article reporting that banks lending dropped 1.4%. The story used outstanding loan balance and lending interchangably, and of course the two terms are completely different. Dick Bove had a note about how to calculate lending at banks:
This is the method one should use to determine if banks are lending money in a given quarter:
• First, take the gross loan number for the third quarter. Gross loans are those held in portfolio and
for sale.
• Second, deduct from this number the loan loss provision for the fourth quarter.
• Third, deduct from the third quarter gross loans the paybacks on existing loans that may have
occurred in the fourth quarter. This would be 1/4th of 20% assuming a five year life on the
portfolio.
This method is based on a key assumption and its accuracy is doubtful. But according to the quarterly release by JPMorgan and Bank of America, they have lent out $100 billion and $115 billion in the fourth quarter respectively.
Curious myself, here is another method I have used to measure whether banks are lending or not: look at the issuance of bonds and new debt. (MBS is a good proxy for newly issued mortgages and ABS is a good proxy for new credit card, student, auto and other types of loans) As shown below, banks did not stop lending, but they have cut back lending on particular types of loans.
