VIPs
- In the three months leading up to early June, consumer loans ballooned by roughly $40 billion, driven by higher auto loans and credit card borrowing; meanwhile, CRE loans have expanded by $70 billion despite urban flight concerns, due to growth in industrial properties
- Since peaking in May 2020, C&I loans have steadily shrunk by more than $500 billion, aided by a reversal in bank credit lines from the initial pandemic shock; the drawdown in C&I activity has mirrored the steady improvement in the layoff picture as jobless claims decline
- As a share of commercial bank assets, loans dropped below 50% for the first time ever this year; at roughly 40%, cash and securities are at their highest share ever, with securities being added at an $84 billion monthly pace since March 2020, seven times the 2009-2019 average
Some of Canada’s best exports include Canadian bacon, ice hockey, John Candy and…red-leather-bottomed Loverboy. So revered was the Canadian rock band and the staying power of the 1981 pop megahit “Working for the Weekend,” it was immortalized in a 1990 Saturday Night Live sketch. Featured were the late greats, Patrick Swayze and Chris Farley, competing to be Chippendales dancers. (Please YouTube now if you’ve never seen and thank us later.) An interview with guitarist Paul Dean expounded on the song’s origin: Walking near his home on a gorgeous Wednesday afternoon in a heavily populated area, Dean was struck by the desolation and asked himself: “Where is everybody? Well, I guess they’re all waiting for the weekend.” Dean shared his inspiration with lead singer Reno, who countered with, “Why don’t we call it, ‘Working for the Weekend?’” The lyrics thus twisted to perfection, the rest, as they say, is history.
Being the dry science, economics seldom come with a twist. Data are released in a calendric routine in a pattern that repeats itself ad infinitum. Exciting, no? One such release via the Federal Reserve can be classified under, “waiting for the weekend.” Shortly after the New York Stock Exchange bell closes the trading week, the Fed posts its H.8 report on Assets and Liabilities of Commercial Banks in the United States. Those few Wall Streeters lucky enough to still be working from home can grab a cold one and peruse the banking sectors’ balance sheet into the weekend’s 48-hour happy hour.
Commercial banks’ loan books are divided four ways — consumer, residential real estate, commercial real estate and business (a.k.a. commercial & industrial, or C&I) loans. Each one of these buckets recorded different performance during the pandemic.
Consumer loans’ sharpest curtailment occurred from March to June 2020, when balances fell nearly $100 billion over a 14-week span; they then treaded water for about eight months before beginning a ‘U’-shaped recovery in March 2021. Over the three-month stretch to early-June, about half of the near $40 billion bounce in consumer loans was tied to higher autos loans while one fourth was attributable to increased credit card borrowing.
Over the entire pandemic period, residential real estate loans contracted a little more than $100 billion, a data point that runs counter to a housing market that’s been en fuego. The asterisk to be inserted here is that many mortgages are not held on bank balance sheets, but instead sold into the mortgage-backed securities (MBS) market. The decline over the last year doesn’t communicate fundamental weakness but rather a financial policy decision. The caveat on the asterisk is that banks are well aware that they, once again, may have over-hired in their mortgage departments as housing looks to be peaking.
Staying on the subject of real estate, despite urban flight concerns bleeding into the multifamily space and broader concerns about the capital spending outlook, commercial real estate loans have expanded by about $70 billion. We would add that the gains here were likely reflective of the red-hot growth in “industrial” properties to support the e-commerce buildout in warehouses and distribution centers.
C&I loans peaked way back in May 2020 and balances have been grinding lower ever since (purple line). The more than $500 billion shrinkage, however, is partly a reversal of bank lines of credit drawn down in the initial panic to ensure ample cash was on hand. Note that the reduction in C&I activity parallels the continued improvement in the layoff picture, as evidenced by falling jobless claims (orange line).
More importantly, C&I paydowns were facilitated by the Federal Reserve’s corporate bond bailout that opened capital markets lending that’s run at record speed since then. Looking at this sector in isolation is risky given the holistic credit profile requires an appreciation for the $1.2 trillion that’s been tacked on via capital markets since the bond market passed the $10 trillion in outstanding milestone in February 2020. The Fed has, once again, addressed the specter of over-indebtedness on corporate balance sheets by “assisting” a further debt build.
Stepping back, commercial bank assets are also a key guide to the lenders’ perspective on the economic outlook. We broke down these assets on a risk spectrum from loans to securities such as Treasuries and MBS to cash. To level the playing field, each was pitted against total assets to depict bank executives’ provide an evolving vista of the lending environment. Our findings:
- The loan share dropped below 50% of total assets for the first time ever in this year’s first and second quarters (blue line).
- The share of securities and cash has risen throughout the pandemic and stands at the highest level on record so far in 2021’s second quarter (red line).
- Banks looked to have carried out their own “quantitative easing (QE)” program. Since March 2020, securities have been added to commercial bank balance sheets at an average monthly pace of roughly $84 billion, seven times greater than that of decade through 2019.
Bankers are working for the weekend, not through it to make risky loans as if it was the early 1990s. Their aversion to loans and internal QE run amok imply that money velocity will remain depressed until further notice. Change the construct of the bank asset side, and then we’ll talk about a velocity recovery. Until then, the inflationary signal is just not there.