Big Banks have been increasingly extending more lending to businesses. The intended purpose of the increase in lending is to help companies increase spending on workers and equipment as the economy improves. The increase in lending is good for both banks and companies. Banks benefit from being able to make up for the current low demand in consumer borrowing. Companies also benefit from acquiring more capital to expand and start on new investment projects.
Earnings results from JP Morgan, Citigroup, Bank of America, and Wells & Fargo showed an “8.3% increase in commercial loans outstanding in the first quarter from the same period a year earlier”. This implies that companies are becoming more confident to borrow now that we are climbing our way out of the recession.
Companies are taking advantage of banks’ loosening their lending standards by borrowing from banks to increase investments. For example, Craig Freedman- CEO of a public transportation company, Freedman Seating Co., has been borrowing more from Wells Fargo for capital purposes now that the economic outlook is starting to look up. It is also a win-win situation for banks because the increase in commercial lending helps them offset the low demand for mortgages and other related loans. Consumer borrowing is still slow to pick back up given that reckless lending by banks was the cause for the recent financial crisis. Consumers have lately more cautious to take on new debt.
The fact that companies are starting to acquire long-term fixed-asset loans and increase their equipment stock is definitely a good sign. My second blog post of the semester was a post on how business investment had more or less stayed the same given that rates were low. Thus, interest rate is not the sole factor in investment decisions of most companies. Now, as business investment is picking up, it is easy to see that other economic factors are relevant for businesses decisions to invest. Compared to early January, there is much more optimism in business expectations of profits, higher stock market expectations, and more of a realization that the economy is able to see the ‘light at the end of the tunnel’ in regards to the recession. It is true that consumer spending is a leading indicator of business investment, but in this case I think that the opposite even holds true. When the public sees that businesses have more optimistic expectations and start investing more for their future, businesses will require more workers to get started on investment plans and more hours will be given to the existing workers that are given new projects. Indirectly, business expansions will provide the public with more job opportunities thus boosting income and allowing for higher consumer spending.