Monday, October 20, 2008

Commercial Banks are Lending More than Ever?!

During the 1930s bank panics, banks:
  1. lost deposits and
  2. tried to increase their short-term assets rather than make loans.

During the last week of September 2008 (at the height of today's banking crisis), large commercial banks:

  1. increased deposits by $232 billion (normally, this is like 9 months increase)
  2. increased borrowing from "others" (ie., the Federal Reserve) by $150 billion
  3. increased ownership of "Treasury and Agency securities" by only $24 billion
  4. increased ownership of home equity loans by $41 billion
  5. increased ownership of residential mortgages by $102 billion (this is a normal one year's increase)
  6. increased ownership of commercial real estate loans by $46 billion
  7. increased ownership of commercial and consumer loans, although by less massive amounts than those cited above

The small commercial banks (in the aggregate) had much smaller balance sheet changes. I am still digesting this (you can read it at the Federal Reserve www site), but I suspect that much of the loan increases are "passive" -- that is, banks had already committed to customers that they could have access to credit and those customers took full advantage (i.e., it is the bank customers who are hoarding liquidity). Likely that is why deposits increased so much: bank loan customers just turned around and made deposits. Nevertheless, it is notable that banks honored their commitments, and then stand to make an easy profit as their customers receive less interest on the deposits than they pay on the loan.

Interest rates are also coming down (see my next post). Thus, it is difficult to see any effect on the supply of bank loans to the nonfinancial sector in either the quantities or in market prices. If this financial crisis were such a big deal for the nonfinancial sector, why is it so hard to see in the banking statistics?

Charts forthcoming.

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