Looking over the FRB’s bank data, clear trends emerge with respect to the growth (or lack thereof) in the banking system.  Looking at seasonally adjusted data for commercial banks, total loans & leases are down 2.4% YoY.  Declines in real estate (-5.4%) and Consumer (-6.6%) overcome moderate C&I growth (+3.3%).  See graph below which shows YoY C&I and Real Estate changes.  It is difficult to distinguish how much of the real estate contraction is attributable to write-downs versus maturing loans not rolled over.

With total assets up slightly, the shift out of loans must end up somewhere on the balance sheet, but where?  We will explore that answer below.

Contraction more prevalent in small banks

Taking a deeper dive into the data uncovers greater loan contraction within small domestically chartered banks, where total loans fell over 3% YoY versus the 2.4% total loss referenced above.

These small banks (defined as any bank not in the 25 largest), increased total investment securities by ~12% YoY.  Treasury and Agency securities grew 15% while Agency MBS rose 23%.  Cash at the Fed also grew ~7%.  In aggregate, total commercial banks added a net ~$150bil over the last year in both Treasury & Agency and Agency MBS.  Interestingly, this debunks the somewhat prevalent belief that banks are not purchasers of UST’s.

Below: banks continue to plow deposits into their investment portfolio with growth in government securities outstripping the total.

Loans fall, cash rises

Commercial bank cash (vault cash, balances at other institutions, and amounts at the Fed) are up over 38% YoY.  Clearly there are big implications with ~$2 trillion sitting in cash (~30% of total loans) at commercial banks.  Despite a banking system flush with liquidity, it’s not turning over.  As evidenced by the data, banks (especially small) have been funneling this cash into government securities or leaving it at the Fed to earn 25bps (IOER).

Conclusion

C&I lending is showing a pulse, but contraction in real-estate & consumer lending outstrips C&I growth.  As total assets rise, banks have been forced to deploy deposits into either government securities or settle for IOER.  The above data leaves more questions than answers including:

-How much longer will it take for Banks to dig through their real estate book?

-As bank NIM continues to contract, will banks get more aggressive with their excess liquidity by taking on greater duration and/or credit risk with their securities?

-Is this data representative of the rest of the credit provided? (A Feldman & Lueck study in 2007 showed that regulated commercial banks provide at most one-third of the total credit to firms in the US economy)