Michael Moebs, Moebs $ervices
LAKE FOREST, Ill.—Net loans and leases of banks, thrifts and credit unions have grown only 1.3% year to year since their peak growth in 2007, according to a new study by Moebs $ervices.
“Since 2007, GDP has grown over 2% and money supply over 3%, but overall loans have grown only 10.6% when comparing the eight year period of 2007 to 2015,” said Michael Moebs, economist and CEO at Moebs $ervices.
Main Street banks did not fare well in the return to pre-Great Recession levels. Current loans for banks under $1 billion in assets are 14.1% less than in 2007, said Moebs. Credit unions fared much better, showing almost a full return to (-0.6% change) 2007 levels.
Small Biz Suffering
The Moebs Services study analyzed 12,641 financial institutions.
“The key takeaway is those banks that do the most lending to businesses with less than 25 employees are still below their 2007 loan activity after seven years, when Lehman Brothers went down and the Great Recession started,” said Moebs.
The Federal Reserve’s studies in the past five years identified over two-thirds of the new jobs come from small businesses with less than 25 employees.
“These small businesses do not go to the large banks to get loans,” said Moebs. “Small businesses stay local and go to their local Main Street financial institution. If the Main Street financial institutions are not lending, or at least not growing in loans, then jobs are not created. This is a simple economic principle that seems to elude those who oversee fiscal and monetary policies,” noted Moebs.
Wild, Wild West
Moebs called the period from 2002 through 2007 the “wild, wild west of lending.”
“The loan to deposit ratio (LTD) in 2007 for financial institutions $10 billion to $50 billion was greater than 100%. How can loans exceed deposits? Depositories borrowed money to fund loans – a practice exacerbating the mortgage bubble and producing the Great Recession,” said Moebs. “Is the LTD falling from 92% in 2007 to 71% today a resetting to normal levels? Or will there be an increase in LTD in the next year? Those Financial Institutions at their optimal economy of scale, $5 billion to $10 billion in assets, appear to have a high LTD, while others, both larger and smaller in assets, shrink in LTD.”
Moebs said a key question for consumers and businesses budgeting for large investments is: Will the Federal Reserve Bank increase rates? He said financial Institutions, especially Main Street institutions, need to know what the Central Bank is forecasting and what it will do in 2016.
Uncertainty Over Fed Hike
“The uncertainty is damping economic prospects. In any circumstance would a decision be made if the core units are not at full strength, in this case loan levels back to normal?” said Moebs.
Moebs explained that the study shows Main Street banks, which lend to small businesses who in return create the most jobs, are not willing to increase lending levels yet.
“Until Main Street banks can find a way to break out in lending, the economy won’t start moving and jobs will not be created. And that is the best reason for Janet Yellen to hold off raising rates,” said Moebs.