Monday, June 08, 2009
the reality of commercial bank lending
Looking at data on outstanding bank credit is misleading, because it doesn’t capture changes in bank behavior.
Besides the blip in Q3 2008, the picture is pretty simple: we have a steady decrease in bank lending from the beginning of 2008. So what happened in Q3?
Well, as anyone at JPMorgan should know, JPMorgan acquired the assets of Washington Mutual. Washington Mutual was technically a thrift, not a commercial bank, so its assets were not counted as commercial banking assets . . . until September 25, 2008, when they became JPMorgan’s assets. At the end of Q2, Washington Mutual had $310 billion in assets, of which the vast majority counted as bank credit. So $300 billion of the “new” bank credit in Q3 was just the result of WaMu’s collapse. Since the chart above shows annual rates, that accounts for $1.2 trillion, or over two-thirds of the total for Q3.
What else was going on in Q3? For one thing, many large banks were forced to move assets from their off-balance sheet entities onto their balance sheets, which caused one-time increases in “bank credit.” There is also $100 billion in “open market paper” ($400 billion annualized), which includes both asset-backed and regular commercial paper; this line that had a value of exactly zero in all periods back to 2004. Looking at the table for open market paper, it’s clear that everyone else (money market funds, mutual funds, etc.) was dumping open market paper, so most likely the banks (who issued a lot of the stuff during the boom) were forced to keep it on their balance sheets.
In short, the increase in bank credit in Q3 – without which Cembalest’s chart would look very different – was due to exceptional items that were a product of the credit crunch, not any actual increase in bank lending.
i've been emphasizing the collapse of securitization as the key driver of credit deflation, and it is -- but that's not to say that ordinary bank lending has in any way been inflating.
that is important as well, given that changes to FASB 140 are under consideration (and considerable lobbying pressure) as the FASB to essentially eliminate special-purpose vehicles of the kind that allowed the banks to become major securitization players with off-balance-sheet accounting and wholesale funding. the banks successfully lobbied for mark-to-market relief from FASB 157 earlier this year, and may well remain in charge of the agenda. i don't imagine anyone would argue that such changes would only increase banks' funding difficulties, as the commercial paper market that floated a lot of these QSPVs is on life support. the banks would be looking at some combination of capital raising and further delevering if/when a revised FASB 140 is handed down.