"Why aren't banks lending money?"
Some version of this question has been asked countless times since the aftermath of the 2008 financial crisis. Small businesses asked it. Commentators asked it. Economists asked it. President Barack Obama asked it. The frustration was understandable. Whether true or not, the public perception was that banks took extraordinary bailout funds, and then told borrowers to get lost. Not until that ends, some said, could the economy recover.
But it may be nearing an end. Bank lending is bouncing back to life.
With most major banks done reporting fourth-quarter earnings, one trend is clear: For the first time in a while, loan growth is back. JPMorgan Chase's (NYSE: JPM ) total loans grew 4.4% in the last quarter. Citigroup's (NYSE: C ) loan book grew nearly 2%. Wells Fargo (NYSE: WFC ) saw its loans grow 1.3% in the quarter. US Bancorp (NYSE: USB ) , Sun Trust (NYSE: STI ) , and others grew their loan books as well. A lot of these banks had been paring back on loans for the better part of three years. Not only has that trend turned around, but it's happened quickly.
As JPMorgan CEO Jamie Dimon put it in a conference call last week, loan demand was coming from "everywhere." "Industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations," he said, according to The Wall Street Journal.
Small-business lending was up 18% in the year ended November to the highest level in four years. Growth in commercial and industrial loans has also rebounded sharply, now at more than 10% a year. Total C&I loans are back to levels seen in late 2007. Consumer loan growth, while flat for 2011, perked up at the end of the year, jumping 5.6% in December from the same month the year before.
Bank lending is back. What should you make of it?
There was always something ironic about people being outraged that banks reduced lending after they nearly destroyed the economy through binge lending. I never liked the phrase, but the saying "You can't solve a debt problem with more debt" has truth to it. In that sense, some find it worrisome that the debt spigot is opening back up -- it looks like we're going back to our old, dangerous ways.
But keep in mind how much households have slashed their debt burdens over the last few years. As a percentage of income, household debt payments are now at the lowest level since 1994, and actually below average over the last 30 years:
Source: Federal Reserve.
Though I've argued in the past that deleveraging may need to continue for perhaps another decade, it's possible that such an outlook is too pessimistic. Last week, McKinsey Global Institute released a paper on global deleveraging arguing that the United States was well on its way to working off excess debt. "Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. U.S. households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt." Two years is still a long time, but turning points can't be predicted with precision, and it's possible that America is rebounding quicker than some give it credit for. And at any rate, adding a moderate amount of debt at current levels would hardly constitute the onset of a new bubble.
If this trend holds -- famous last words, to be sure -- things could get better, quickly. For years we've heard that businesses couldn't create new jobs until they had access to the credit necessary to expand. At long last, it looks like they do.