Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Bank Credit Growth in the Tenth District: Recent Developments

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Bank Credit Growth in the Tenth District: Recent Developments

Article excerpt

Bank credit, the sum of loans and securities at commercial banks, is widely viewed as providing information about the current and future state of the economy. Analysts have been concerned about the behavior of bank credit during the nation's recovery from the 1990-91 recession. At first, analysts worried the recovery would be hampered because banks were making too few loans and purchasing too many securities. More recently, loan growth has picked up and securities growth has slowed, a development some analysts view as a sign the economy is growing too fast to keep inflationary pressures in check.

Bank credit growth may also shed light on the current and future state of the district economy. Trends in Tenth District bank credit may vary substantially, however, from trends in the nation as a whole. For example, district banks could be in better financial condition than banks nationwide, making district banks more willing to lend. Or district businesses and households could be more optimistic about future earnings, making them more willing to borrow.

This article describes the growth in bank credit in district states during the recovery and compares the district experience with that of the nation. The article concludes that loan growth and securities growth followed the same pattern in the district as the nation, but that loan growth in the district was much stronger. The first section documents the acceleration in loan growth and slowdown in securities growth in the nation. The second section shows that loan growth and securities growth varied the same way in the district but that loan growth was stronger in the district. The next section shows that growth of most loan categories was stronger in the district than in the nation. The last section shows that loan growth was stronger in most district states than in the nation.

BANK CREDIT GROWTH IN THE UNITED STATES

Bank credit growth in the nation has shown a clear pattern of acceleration during the recovery. In the early stages, total bank credit grew sluggishly, increasing only 2 percent on average in 1991 and 1992 (upper panel of Chart 1). (Chart 1 omitted) But as the recovery proceeded, bank credit grew more rapidly, increasing at an average rate of 6 percent in 1993 and the first half of 1994. [1]

The slow growth and subsequent recovery in U.S. bank credit were due entirely to changes in bank loans. U.S. bank loans fell 3 percent in 1991 and 1 percent in 1992. Loan growth then strengthened to 5 percent in 1993 and 7 percent in the first half of 1994.

Bank security holdings behaved in opposite fashion during most of the period, but not enough to outweigh the effect of loans on bank credit. Securities at U.S. banks rose very fast in the first two years of the recovery, growing 14 percent on average in 1991 and 1992. Securities growth then slowed to 8 percent in 1993, the same year loans began to accelerate. Securities growth slowed still further in the first half of 1994, falling to 3 percent.

These trends in loan growth and securities growth are not unusual for an economic recovery. Loans typically grow slowly during the early stages of recovery and then accelerate as the economy picks up steam. At the beginning of a recovery, businesses and households are usually too unsure about future prospects to borrow heavily. And banks are usually too worried about borrowers' ability to repay to lend aggressively. As the recovery proceeds, businesses and households become more willing to borrow and banks become more willing to lend. As a result, bank loans accelerate.

For the same reasons, security holdings usually grow rapidly at the beginning of a recovery and then slow down. When loan growth is weak, banks typically invest some of their excess funds in securities. As loans rebound, banks finance the new lending partly by drawing down security holdings.

While weak loan growth and strong securities growth were both to be expected coming out of the 1990-91 recession, most analysts agree that loan growth was unusually weak and securities growth unusually strong. …

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