More and more stories are appearing that exhibit the reasons why the commercial banks below the behemoth size are not seeing their lending growing. And, the evidence appears to be that the slowdown in lending is being affected by the demand for loans from businesses and households as well as by the supply of loans coming from the banking sector.

Yesterday, I touched on the aggregate balance sheet figures published by the Federal Reserve. (See, One can interpret the most current data as showing that the financial difficulties that larger commercial banks have been facing are migrating to the smaller banks and this is affecting bank lending activity.

This morning there were two articles in the New York Times on the front page of the business section that provide additional antidotes and analysis on what the “less-than-huge” commercial banks are facing. The first looks at the situation that some borrowers are facing in attempting to obtain loans from banks. This article, by Peter Goodman, “Clamps on Credit Tighten”,, emphasizes the difficulties small companies are having because they cannot obtain funds from the banking system at this time.

It becomes apparent within the article, however, that the shortfall of lending is not solely coming from the supply side. Raymond Davis, the chief executive of Umpqua Bank, in Portland, Oregon is quoted as saying, “Banks want to lend money. The problem is the effect that the recession is having on us. Some of these businesses are still trying to come out of it. For them to go to a bank, if they are showing weak performance, it is harder to borrow.” The Umpqua Bank is a regional lender.

In other words, businesses know that the banks have tightened their requirements when it comes to lending and they know that their balance sheets and income statements are not up to these new bank standards. Consequently, they are postponing even going to the bank until such time as they are in a position to get a favorable response on a loan application.

These business, of course, are ones that are not in such dire straits that they are desperate for funds and are trying to find any source they can for obtaining the funds that they need. Fortunately for them they can wait out the current state of affairs, at least for the near term. However, this delay means that people don’t get hired and inventories are not purchased and so economic recovery is pushed off longer into the future.

Also, these companies are restructuring in an effort to get their balance sheets in order: “Among small privately held companies, the amount of debt they carry as a portion of their equity has slipped by about 5 percent since 2007” the article reports. “The drop reflects not only how companies have cut their inventories and paid down debt, but also the tightened credit terms they face when they try to borrow.”

The intermediate term problem relates to the cumulative result that if firms can’t borrow, for whatever reason, they can’t conduct their business, they can’t hire people who then don’t have money to spend on things, and the firms can’t make profits to improve their balance sheets. The article contains several narrative stories on how this is playing out in various areas of the country.

Another article in the New York Times, deals with the “pace” of loan losses. See the article by Eric Dash, “Pace Slows on Losses for Banks”, The gist of the article is that although loan losses at commercial banks “are still expected to stay high through most of next year” the speed at which these losses are accumulating is lessening. Loan losses “haven’t peaked, but outside of mortgages, we are getting close,” according to Scott Hoyt. Again the evidence points to the differences in where the difficulties are coming. Larger banks are currently suffering more from delinquencies and defaults from consumers.

The “Less-than-large” banks are facing rising pressure from problems in the commercial real estate area. “Elbowed out of the credit card business and mortgage lending businesses by their larger rivals, (hundreds of small, community banks) began aggressively financing home construction projects as well as office, hotel, and retail development deals. Many of those borrowers are just starting to default, leading the banks to book giant write-offs and set aside more money to cushion future blows.”

That is, these charge offs are just starting to hit the books!

Some businesses are finding one possible source of funds that they have not tapped to any degree in the past. This is the bond market. As reported by Goodman, “As the financial crisis has largely eased in recent months, big companies have found credit increasingly abundant, with bond issues sharply higher.” This movement to bond financing seems to be occurring in companies that are smaller than big and it seems to be a worldwide phenomena. For information on this latter development see the article in the Financial Times, These companies are using funds for the bond markets in ways that they formerly used bank lending for. Plus, they are not faced, in the bond markets, with some of the covenants and restrictions they faced with the banks.

This move by companies to obtain bond financing raises an interesting question. The question is this: What if this movement is part of the overall effort to “securitize” everything? That is, what if almost all funding occurs in “financial markets” and not in financial institutions as it mostly has been done in the past? Maybe this slowdown in bank lending will accelerate this movement to market-based financing. Then maybe the commercial banking industry will shrink as has the thrift industry (see my “Have Thrifts Outlived Their Usefulness”,

Certainly commercial lending is not the major part of the balance sheet of the commercial banking industry as it once was. Commercial and Industrial Loans at commercial banks, as of September 30, 2009, represent only about 12 percent of the total assets of the banking system. In January of 2000, this number was about 18 percent. In the 1980s, the number was substantially higher. The makeup of commercial banks is changing. Is the current move to greater use of the bond market just one more step along the path to the remaking of the whole financial system?

Just a thought.