Are Banks Lending?

It’s no secret that credit significantly decreased at the peak of the financial crisis in 2008. Just as certain areas of the U.S. economy are showing signs of a recovery, have lending conditions improved yet? Well, it really depends on whom you ask. Some banks say they have increased lending, while others say they would like to issue more loans, but there is little to no demand.

On the other hand, borrowers say they can’t obtain credit due to tighter underwriting standards and additional collateral requirements.

Some financial institutions have indeed increased their commercial real estate and small business lending. For example, Wells Fargo’s commercial loan portfolio rose 1.7 percent from the fourth quarter of 2010. Additionally, First Niagara Financial Group, a Buffalo, New York-based bank, increased its small business loan portfolio by more than 40 percent between 2009 and the end of 2010.

However, these are two of a relatively small number of banks that expanded their lending portfolios. Yet banks that tout their recent lending increases may be presenting a distorted picture. Although their commercial real estate and/or small business lending portfolios may have increased in size, they often fail to mention how this increase was achieved.

For example, some financial institutions have gobbled up assets from the 365-plus financial institutions that have failed since the financial crisis. Others have poached customers from competitor banks, meaning that they’ve taken control of existing loans, but have not issued new loans or raised loan sizes for their borrowers.

According to the U.S. Small Business Administration, small business lending actually fell 6.2 percent from a year earlier to $652.2 billion in 2010. Also, a Federal Reserve report indicates that commercial real estate loans have fallen from $1.73 trillion to $1.46 trillion since December 2008.

So why is there such a disparity between bank and federal government loan data?

This is due primarily to the different ways banks and government agencies calculate lending statistics. When financial institutions report a rise in their lending activities, they often refer to new or renewed loans in a particular period of time – usually the most recent quarter. Conversely, most government lending data includes the total outstanding credit or what is owed to a bank, regardless of whether it is a new or existing loan. This balance drops as loans are repaid, but will rise as new loans are made.

According to the Wall Street Journal, at the peak of the financial crisis, most financial institutions were not issuing new loans, and outstanding balances fell significantly as loans were amortized or written down. While banks such as Wells Fargo have slightly increased their lending, many financial institutions are currently not issuing a sufficient number of loans to offset their diminishing balances.

Furthermore, the banks that are issuing new loans are often lending only to the strongest firms and commercial property owners – those that tend to be larger with cash on hand. But if business owners had money sitting in a bank account they wouldn’t need a loan. Small firms, with assets of less than $1 million, have disproportionately received fewer loans than “larger” small businesses.

Additionally, while high-end properties in top markets have found access to capital this year, smaller-sized investment properties in mid-to-lower tier metropolitan areas continue to struggle due to a lack of access to financing.

Banks say this is because of a lack of demand. Then again, many credit-worthy small business and property owners have been rejected for loans by multiple banks due to extremely tight underwriting standards. In fact, almost 50 percent of NAR’s commercial membership said that lending conditions have tightened in 2011. Moreover, nearly 60 percent of this same membership indicated a failure to complete a transaction this year due to a lack of financing.

While loan demand may be part of the reason why financial institutions aren’t lending, the main reason is due to high concentrations of construction and commercial real estate loans at small regional and community banks. Nearly 1,300 of these banks have what economists call “problematic” exposure to commercial real estate loans.

As commercial property values continue to decline – currently down 43 percent – many banks have been forced to take huge write-downs and losses. This has caused many of these financial institutions to hoard capital, which has led to a decrease in commercial real estate and small business lending.

NAR has been pressing policymakers to encourage more private-equity investments in these financial institutions in order to recapitalize struggling banks and bring back much-needed equity into the banking system. This would allow banks to clear their balance sheets of non-performing assets and resume lending again.

Although it is clear that a very limited number of banks have increased lending to businesses and consumers, many financial institutions are not meeting the credit demand of borrowers. The real question is when will they start?