Bank Lending Break Through?

Bank lending seems to be back in action again. Banks all around have been on a stand still waiting for loan growth to pick up. Although the winter provoked a minor drawback, loan growth is what banks need to get the ball rolling. Without these loans, banks have had to try “to bolster earnings through repeated rounds of cost cutting and reversals of loan-loss reserves.” While loan growth seen in the first quarter isn’t a clear indication that we are back on track, it does provide signs that the lending environment is in fact improving. Although all the results have not been accounted for yet, the latest data has shown that overall bank loans grew from a year earlier at an average of 2.5%.

This pace is very similar to what occurred in the final quarter of 2013. As you can see in the FRED graph, there was a strong increase in the total value of loans towards the end of 2013.

While this may look rather attractive, but there is still room for improvement. These rates and values can decrease very quickly, especially if lenders are holding too much collateral. This means that our economy needs to continue to move forward and it all depends on how the Fed decides to solve the problem for banks. Michael Ivanovitch writes, in a CNBC article, that he believes the Fed is aware of the situation we are currently in; currently there is still weak bank lending, which is stalling our growth in the U.S.

“Monthly asset purchases—on top of a virtually zero percent interest rate—have been a relatively easy part of a sweeping crisis management. The verdict on that policy is given by America’s demand, output and employment. It is perhaps time to adjust policy instruments and intermediation techniques to address some apparently structural issues whose solution does not seem to be in the wall of money thrown at the U.S. economy.”

While we at least have seen a stabilization following a long period of declining rates of loan growth, this is something we must still be aware of. The FRED graph has been allowed a number of interpretations to be good for the economy, but there are still weaknesses. Housing has begun to cool is recent pace and we are nowhere near enough to offset the losses already incurred. What I believe will keep our economy stable for the summer months will be a couple key decisions made by the Fed and how investors will respond to all the recent buzz. If nobody gets too anxious and jumps the gun, banks will be confident in lending allowing for an increased pace in our economy.