Commercial banks print money.
They are able to extend credit to the real economy, temporarily boosting aggregate demand and GDP.
They are not doing that, and it's key to pay attention!
Why?
1/10
They are able to extend credit to the real economy, temporarily boosting aggregate demand and GDP.
They are not doing that, and it's key to pay attention!
Why?
1/10
The chart above shows the 2y mov.avg. of the growth in US bank lending to the real economy. It therefore excludes mortgages, but it includes commercial, industrial and consumer loans - basically credit that ends up on the account of consumers the engines of the real economy
2/10
2/10
It's now running at a very modest +1.6% on an annualized basis, peaking from the +5.0% reached in early 2020 when governments effectively guaranteed the majority of the credit risk on bank loans during the first stages of the pandemic.
3/10
3/10
As the government guarantee on loans fades away, banks have been very reluctant to lend to the real economy at a sustained pace.
This is because banks lend when the trade-off amongst those 3 factors looks appealing...
4/10
This is because banks lend when the trade-off amongst those 3 factors looks appealing...
4/10
A) Loan yields (the higher the better)
B) Borrowers' creditworthiness (the less leveraged, the better)
C) Regulation (less capital requirements = good)
The trade-off looks horrible today, and has looked bad for a while.
5/10
B) Borrowers' creditworthiness (the less leveraged, the better)
C) Regulation (less capital requirements = good)
The trade-off looks horrible today, and has looked bad for a while.
5/10
Loan yields are very low as a combination of risk-free yields and credit spreads being compressed.
The private sector is hugely leveraged and the few healthy balance sheet agents do not want/require credit.
6/10
The private sector is hugely leveraged and the few healthy balance sheet agents do not want/require credit.
6/10
Regulation is pretty tight, requiring banks to attach significant capital to their lending activity and hence constraining return on equity (RoE).
The regulatory pressure has increased materially since the GFC - regulators have probably overcompensated.
7/10
The regulatory pressure has increased materially since the GFC - regulators have probably overcompensated.
7/10
Hence, banks are not lending to the real economy and they are unlikely to do so - this materially slows down credit creation and hence an important engine for economic growth.
Net bank lending is a very important contributor to my timely G5 Credit Impulse prop indicator.
8/10
Net bank lending is a very important contributor to my timely G5 Credit Impulse prop indicator.
8/10
Did I mention QE? No. And for a reason.
The amount of bank reserves is basically irrelevant for bank lending activity - you can flood the system with as many reserves as you want, but this is not going to change the picture described above.
Banks don't lend reserves.
9/10
The amount of bank reserves is basically irrelevant for bank lending activity - you can flood the system with as many reserves as you want, but this is not going to change the picture described above.
Banks don't lend reserves.
9/10
Japan shows the way.
Base money (red line) = BoJ balance sheet.
Bank loans (blue line) = net increase in bank lending.
Not a positive correlation.
Not a zero correlation.
A NEGATIVE correlation.
Banks don't lend reserves, and they don't think about reserves when lending
10/10
Base money (red line) = BoJ balance sheet.
Bank loans (blue line) = net increase in bank lending.
Not a positive correlation.
Not a zero correlation.
A NEGATIVE correlation.
Banks don't lend reserves, and they don't think about reserves when lending
10/10
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