First, we need to define whatthe Federal Reserve calls “Small” banks. The Federal Reserve defines small banks as domestically chartered banksthat are not counted among the largest 25 domestically chartered banks in theUnited States. Hence, “Large”domestically chartered banks are the largest 25 domestically chartered banks inthe United States.
As of September 7, 2011, thelargest 25 domestically chartered commercial banks in the United States accountfor 56 percent of all the banking assets in the United States. The smaller banks represent about 28percent. Foreign related financialinstitutions control about 16 percent.
From August 2010 to August2011, the total assets held by the small banks in the United States grew byone-half the rate at which the total assets in the largest 25 banks. The “large” banks grew at a 1.4 percentannual rate while the “small” banks grew by 0.7 percent.
Over the last calendarquarter from the banking week ending June 1 through the banking week endingSeptember 7, the smaller banks actually shrank by almost $20 billion while thelarger banks grew by about $165 billion.
Over this last quarter,“Loans and Leases” at the smaller institutions dropped by almost $70billion. At the largest 25 banks, “Loansand Leases” rose by over $130 billion. At the smaller banks, loans fell in ALL categories.
From the banking week endingAugust 3 through the banking week ending September 7, “Loans and Leases” at thesmaller banks rose by only $1.5 billion while they rose by more than $30billion at the 25 largest banks.
One could say that lendingactivity is increasing on Wall Street but not on Mail Street. One could ask questions, however, about thetype of loans that the larger banks are initiating. See my posts from last week: http://seekingalpha.com/article/293657-bankers-expect-weak-profit-performance-in-the-future and http://seekingalpha.com/article/293893-some-banks-are-stretching-for-risk.
But, business loans are notsuffering the most at the smaller banks. Over the past year, residential real estate loans (home mortgages) atthese smaller banks have declined by more than 6 percent, year-over-year. Over the past quarter these loans have fallenby $12 billion.
And the smaller banks stillare suffering through the commercial real estate decline as these loansdeclined by almost 7 percent, year-over-year through August. Commercial real estate loans at these banksdeclined by more than $40 billion over the last quarter alone.
The FDIC reports that therewere 6,413 commercial banks in the banking system as of June 30, 2011. Of this number, 865 banks were included onthe FDIC’s list of problem banks for this date, more than 13 percent of thebanks in insured at that time. Troubledbanks total even more than this, some estimate that more than twice this numberare very fragile institutions.
From these data one can arguethat bank lending activity may be picking up, but it is not picking up amongmany of the smaller banking institutions that still face serious balance sheettroubles. These organizations are notgoing to participate in any economic recovery and, in fact, are going to haveto be closed or absorbed into the banking system that will remain. As mentioned above, even though loans may bepicking up in the largest 25 banks in the country, the loans may not be goinginto the physical investment that would cause the economy to grow faster thanit is.
FOREIGN RELATED INSTITUTIONS,QE2, AND THE EUROPEAN BANKING CRISIS
Dollar deposits continue toflow out of the United States into foreign banking offices through domesticallylocated foreign related institutions. From August 2010 through August 2011, cash assets at these domesticallylocated foreign related institutions rose by about $470 billion! This increase in cash assets tracks closelythe Federal Reserve’s implementation of QE2 and represents about 75 percent ofthe roughly $630 billion rise in cash assets of the whole United States bankingsystem.
The interesting thing for ourpurposes is that the item on the other side of the balance sheet that mostclosely tracks this increase in the cash assets of foreign related bankinginstitutions is “Net Due to Foreign Offices.” That is, this money is going off shore.
From August 2010 throughAugust 2011, this account, “Net Due to Foreign Offices”, rose by almost $540billion. In the last quarter it rose byover $160 billion. In the last month itrose by $112 billion.
Can the rise in this thisaccount be associated with the sovereign debt crisis in Europe and the recentproblems faced by many of the large European banks?
I believe one can make apretty strong case for this conclusion. The Fed’s QE2 preceded the agreements that the central banks made lastweek to provide more US dollars to European banks.
Of course, this provision ofUS dollars to the world is not spurring on economic growth although it may behelpful to preventing another Lehman Brothers meltdown.
