Bank Lending

January 01, 2013

In a previous article I talked about the velocity of money and how an increase in spending, driven by a rise in consumer confidence, could help pull us out of this sluggish economy. Remember, every time an item or service is purchased, taxes and profits are embedded in the transaction. The more this happens, the more tax revenue and profit is generated. So what are the sources of this money? It can come from savings, a paycheck or borrowing. You may remember that the Federal Reserve “infused” lots of money into the banking system over the past couple of years. The Fed was thinking that once the banks had this cash on hand, they would start loaning it out. As companies and individuals borrowing increased, not only would the velocity of money rise, but the volume of transactions would increase also. The only problem was that the banks became so strict on their lending standards, that they essentially have been holding this money instead of loaning it out to small business (those businesses with sales less than $50 million per year). But that is changing. For the first time since 2006 loan standards for these “small” companies became less restrictive. Certain banks are being rather aggressive in competing for both commercial and industrial loans. Some banks like Fifth Third in Raleigh dismissed most, if not all of their Small Business Bankers in August. They may have decided that there is a more efficient way to compete for loans to small business. Then there are banks like Bank of America that recently ramped up their hiring of Small Business Bankers. Apparently some banks believe that re-focusing on business lending is a prudent way to increase revenue. Let’s face it, rates are low. It’s a great time to borrow for those wanting to grow their business or even buy out competitors.

I have been talking to clients and business associates about their experiences with banks of late. It appears that there is also an increased interest in marketing loans to individuals from both banks and credit card companies. One client told me that his credit card company” wouldn’t let me get off of the phone until I let them send me a check”. The company representative said, “I’ll just go ahead and send you the check ($20,000, which was the rest of his credit limit). There will be no interest for the first year. Then “market” rates will apply.” He had to tell the representative “NO” at least 4 times.

What a MAJOR change of attitude! According to Milton Ezrati, Senior Economist with Lord Abbett, banks have been “storing” this stimulus as reserves on their balance sheet. So much so, that the excess accounted for roughly 95% of all bank reserves. The intended purpose of the stimulus was never achieved. Now we are seeing early signs that the money is being used by a sector of the economy that is responsible for most of the jobs in this country. That is good news on the job front. However, that is just one component, albeit, a significant one. The Real Estate market is another significant component. Even though overall bank lending has expanded at a 6.9% annual rate, commercial and residential Real Estate lending continues to fall according to Milton Ezrati. Hopefully, this activity will continue and will spur job growth.


Derek Carawan is a LPL Financial Advisor and LPL Registered Principal with Carawan Financial Partners, Inc. / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at,, 919-870-8181 or derek.carawan@lpl.com1-005786

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