Big Bank Lending on the Decline

Big Bank LendingAs I have been harping on about in these pages, one of the main concepts behind the Federal Reserve’s idea of quantitative easing was to improve lending to stimulate the U.S. economy.

The Fed bought troubled assets from the big banks and provided the banks with funds to lend to their customers. The idea was that once banks had ample cash on their balance sheets, they would lend to businesses; and from there, businesses would spend on expansion and hire more people. But this hasn’t happened nearly to the degree hoped.

Actually, bank lending activity in the U.S. economy is bleak. Businesses are not borrowing as much as one would have expected after the Federal Reserve expanded its balance sheet to almost $3.0 trillion.

According to data compiled by Credit Suisse Group AG, the average loan-to-deposit ratio for the eight big banks in the U.S. economy fell from 87% in the fourth quarter of 2011 to 84% by fourth quarter 2012. Comparatively, in 2007, their loan-to-deposit ratio was 101%. (Source: Bloomberg, February 20, 2013.)


Big banks like JPMorgan Chase & Co. (NYSE/JPM) and Citigroup, Inc (NYSE/C) are lending in the U.S. economy at their slowest pace (as measured by a percentage of deposits) in five years. JPMorgan had the lowest loan-to-deposit ratio at 61% in 2012, compared to 66% in 2011. This means that for every dollar of deposit the bank has on hand, it lent $0.61 of it.

Other big banks like Bank of America Corporation (NYSE/BAC) are also lending at a much slower pace than they did before. In 2012, the bank’s loan–to-deposit ratio was 84%, substantially down from a loan-to-deposit ratio of 92% in 2011.

Dear reader, the issue at hand of banks lending less than they did in 2011 will not be fixed by printing more money, as the Federal Reserve has done through quantitative easing. The problem is that the businesses and individuals in the U.S. economy are scared to borrow and banks have more stringent lending requirements.

It’s obvious that at this point in the so-called economic recovery, quantitative easing by the Federal Reserve hasn’t been as effective as originally hoped. If money printing did work to stimulate the economy (something Japan has proven the opposite of), the U.S. economy would have seen much higher jobs growth and economic growth, as opposed to seeing its gross domestic product (GDP) contract in the last quarter of 2012.

More printing of paper money in the U.S. economy (which is happening at the rate of $85.0 billion a month) will only hurt the dollar and the buying power of Americans who are already struggling.

Michael’s Personal Notes

While presenting the company’s fourth-quarter corporate earnings and disappointing analysts with its revised outlook, the CEO of Wal-Mart Stores, Inc (NYSE/WMT) said, “We are confident that our low prices will continue to resonate, as families adjust to a reduced paycheck and increased gas prices.” (Source: Cheng, A., “Wal-Mart gives cautious view, citing macro worries,” MarketWatch February 21, 2013.)

Wal-Mart, which is known for its low prices, is feeling the pullback on consumer spending. With American consumer spending making up 70% of gross domestic product (GDP), it is no wonder the U.S. economy contracted in the fourth quarter of 2012.

Sadly, weaker retail sales are not the only signal of poor consumer spending. U.S. businesses piling up inventories and slowing industrial production paints a deteriorating picture of the economy as well.

Inventories of manufacturers increased 5.1% from December of 2011 to December 2012. (Source: U.S. Census Bureau, February 13, 2013.) As for production, companies are producing less. In January 2013, production for consumer goods declined 0.2% from the previous month, production of automotive products plummeted 3.9%, and home electronics fell 1.3%. (Source: Federal Reserve, February 15, 2013.)

Sure, inventories go up in times of economic growth because businesses build up stock in anticipation of future orders. But the situation now is different. Increasing inventories coupled with declining production—it doesn’t paint a pretty picture of consumer spending.

As I look forward, hopes for consumer spending and economic growth are bleak, not positive. According to Bloomberg’s U.S. Consumer Comfort Index, Americans are pessimistic—they say the rising cost of gasoline and higher payroll taxes are hurting their pocketbooks and their ability to spend. (Source: Bloomberg, February 21, 2013.)

Dear reader, the stock market rising in value doesn’t mean consumer spending is rising or the U.S. economy is experiencing a period of economic growth. The reality of the matter is that consumers in the U.S. economy are finally tapped and they’re scared. Consumer spending has always been the only way economic growth has happened in the U.S. If consumer spending doesn’t improve, I will continue to stand by my belief: there is no growth in the U.S. economy.

What He Said:

“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom the peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”