Column : To lend or not to lend?

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: More than two-thirds of bankers who lowered credit limits said the uncertain economic outlook played a role; 38 percent who did so cited a “reduced tolerance for risk.”

To look at US credit growth from a different perspective, we should also refer to a recent research paper from the Minneapolis Fed, “Facts and Myths about the Financial Crisis of 2008”. Have C&I credit flows really slowed down in line with the attitudes of bankers indicated in the Fed Survey? The authors address four propositions characterising the credit crisis; they then seek to show these are incorrect. Among these supposed myths are that bank lending to non-financial (C&I) entities and individuals had fallen, as had Commercial Paper (CP) issuance by non-financial firms. CP rates have risen to unprecedented levels. They contend, inter alia, that there has not been any significant cutback in bank lending and that CP rates have not really increased significantly.

The paper is probably drawing the wrong conclusions from the available data. As the Federal Reserve Survey points out, bank lending is rising at least in part because past commitments to lend under revolving credit facilities are now getting drawn upon, when corporations are unable to access the CP markets; these are facilities that banks would have committed to years ago but never thought they would ever have to lend to. US credit offtake data indicates, for instance, an increase in lending around the time of Lehman Bros’ bankruptcy. As a post in a respected blog notes, a footnote in a Fed release shows that loans by large commercial banks increased in the week ending October 1, solely due to the acquisition of $259 billion in assets from non-bank institutions.

As for CP rates, the authors’ conclusion that rates have actually come down says nothing about the volumes related to the CP for that maturity.—eg. 3 month rates may not have moved up, but it may be that only the very highest quality borrowers are issuing 3 month CPs, everybody else might only be able to raise overnight funds.