Summary
- Commercial real estate lending continues to grow rapidly and the smaller banks further underwrite the construction industry.
- Business loans at the largest banks in US continue to rise but support M&A activity, stock buy backs, and hedge fund and private equity transactions.
- Foreign-related institutions are reducing the US cash being taken off shore.
Three areas I would like to focus on today: commercial real estate lending at the smaller banks; business lending at the largest banks; and the reduction in cash assets at foreign-related institutions in the United States.
First, let's look at commercial real estate lending. Over all, commercial real estate loans at all commercial banks in the United States rose at a 7.2 percent, year-over-year rate in July 2014. This amounted to an increase of about $105.0 billion. In the four weeks ending on August 27, 2014, they increased another $7.9 billion.
The largest portion of this increase came at the smaller, domestically chartered banks. Almost two-thirds of the commercial real estate loans in the domestically chartered banks come from the smaller commercial banks, a total of almost $1.0 trillion.
Over the past 52-week period, the smaller banks increased their loan portfolio by 11.0 percent, or about $95.0 billion.
The smaller banks have almost 37.0 percent of their loan portfolios in commercial real estate loans - 24.0 percent of their total assets.
One of the major concerns of the Great Recession was the fear that commercial real estate loans were going to result in a lot more bank failures than actually occurred. The commercial real estate loans were five- to seven-year loans and were to be paid off at maturity. The loans did not turn up on the bad loan lists of the banks because in 2010 or 2011 or 2012 they had not matured yet and hence there was no pressure on the banks to write them down…or off. The hope was that the recovery would allow them to be paid off…or refinanced.
The recovery did its job. The banks were able to refinance the loans…with the consent of the regulators - and, because of the delays in finishing the projects, construction firm's required additional funds to pick up on where they left off during the recession - and these new funds were approved.
One of the major reasons for the increase in the loan balances at these banks is not because of new loans coming on the balance sheets of the banks, but because of the new money given to the borrowers so that they could complete their projects.
The health of these smaller banks is becoming more and more dependent on the ultimate payoff of these commercial real estate loans. My concerns are with the concentration of bank assets in these loans; the shakiness of the economic recovery so dependent on these commercial real estate developments; and the continued shrinkage of the banking system, especially in the number of small banks in existence.
The second area is the growth of business lending, commercial and industrial loans, at the largest banks in the United States. From July 2013 through July 2014, C&I loans in the whole banking system rose by about 11.0 percent, a good healthy number. In the past four weeks, ending August 27, C&I loans rose by another $15.5 billion.
Of this increase, 44.0 percent of the increase came at the 25 largest domestically chartered banks in the United States and another 27.0 percent came from foreign-related institutions.
These organizations primarily lend to larger corporate organizations.
It seems as if the largest proportion of these loans have been going to large corporations - to help them pay dividends, to buy back stock, and to engage in mergers and acquisitions - and to hedge funds and private equity funds to help them finance their current transactions.
Note, that almost all of these uses of funds are not for current productive purposes, either the production of consumption goods or for producing investment in plant or equipment. The money is being used in the financial circuit of the economy to support financial transactions.
This is, of course, evidence of why the efforts of the Federal Reserve are flooding into areas of the economy that do not result in more robust economic growth.
Finally, I would like to call attention to the fact that foreign-related institutions, in the past four weeks or so, have actually been reducing the amount of funds they are taking off shore. I have focused on the behavior of these foreign-related institutions almost every month in my review of the banking system for the past four or five years.
Over the last four weeks, the foreign-related institutions have reduced their "Net deposits to related foreign offices" by almost $80.0 billion. Over the past several years as the financial situation in Europe grew, these deposits grew from a negative amount of around $150.0 billion to a positive amount of about $650.0 billion, a swing of about $800 billion dollars. Not an insignificant amount of the Fed's money to be taken off shore.
We will have to watch this further to really understand what is taking place. The decline could be the result of the actions of the European Central Bank and the efforts of the ECB to lower the value of the euro. We will see.
First, let's look at commercial real estate lending. Over all, commercial real estate loans at all commercial banks in the United States rose at a 7.2 percent, year-over-year rate in July 2014. This amounted to an increase of about $105.0 billion. In the four weeks ending on August 27, 2014, they increased another $7.9 billion.
The largest portion of this increase came at the smaller, domestically chartered banks. Almost two-thirds of the commercial real estate loans in the domestically chartered banks come from the smaller commercial banks, a total of almost $1.0 trillion.
Over the past 52-week period, the smaller banks increased their loan portfolio by 11.0 percent, or about $95.0 billion.
The smaller banks have almost 37.0 percent of their loan portfolios in commercial real estate loans - 24.0 percent of their total assets.
One of the major concerns of the Great Recession was the fear that commercial real estate loans were going to result in a lot more bank failures than actually occurred. The commercial real estate loans were five- to seven-year loans and were to be paid off at maturity. The loans did not turn up on the bad loan lists of the banks because in 2010 or 2011 or 2012 they had not matured yet and hence there was no pressure on the banks to write them down…or off. The hope was that the recovery would allow them to be paid off…or refinanced.
The recovery did its job. The banks were able to refinance the loans…with the consent of the regulators - and, because of the delays in finishing the projects, construction firm's required additional funds to pick up on where they left off during the recession - and these new funds were approved.
One of the major reasons for the increase in the loan balances at these banks is not because of new loans coming on the balance sheets of the banks, but because of the new money given to the borrowers so that they could complete their projects.
The health of these smaller banks is becoming more and more dependent on the ultimate payoff of these commercial real estate loans. My concerns are with the concentration of bank assets in these loans; the shakiness of the economic recovery so dependent on these commercial real estate developments; and the continued shrinkage of the banking system, especially in the number of small banks in existence.
The second area is the growth of business lending, commercial and industrial loans, at the largest banks in the United States. From July 2013 through July 2014, C&I loans in the whole banking system rose by about 11.0 percent, a good healthy number. In the past four weeks, ending August 27, C&I loans rose by another $15.5 billion.
Of this increase, 44.0 percent of the increase came at the 25 largest domestically chartered banks in the United States and another 27.0 percent came from foreign-related institutions.
These organizations primarily lend to larger corporate organizations.
It seems as if the largest proportion of these loans have been going to large corporations - to help them pay dividends, to buy back stock, and to engage in mergers and acquisitions - and to hedge funds and private equity funds to help them finance their current transactions.
Note, that almost all of these uses of funds are not for current productive purposes, either the production of consumption goods or for producing investment in plant or equipment. The money is being used in the financial circuit of the economy to support financial transactions.
This is, of course, evidence of why the efforts of the Federal Reserve are flooding into areas of the economy that do not result in more robust economic growth.
Finally, I would like to call attention to the fact that foreign-related institutions, in the past four weeks or so, have actually been reducing the amount of funds they are taking off shore. I have focused on the behavior of these foreign-related institutions almost every month in my review of the banking system for the past four or five years.
Over the last four weeks, the foreign-related institutions have reduced their "Net deposits to related foreign offices" by almost $80.0 billion. Over the past several years as the financial situation in Europe grew, these deposits grew from a negative amount of around $150.0 billion to a positive amount of about $650.0 billion, a swing of about $800 billion dollars. Not an insignificant amount of the Fed's money to be taken off shore.
We will have to watch this further to really understand what is taking place. The decline could be the result of the actions of the European Central Bank and the efforts of the ECB to lower the value of the euro. We will see.
Overall, the commercial banking system seems to be doing all right and surviving. It is just not contributing much towards further economic expansion.
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