Americans Left Banks Out of Borrowing Binge

Last year was a banner one for debt, but it didn’t look that way for big banks.  Large lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data. The 0.5% drop was just the second decline in 28 years.

Brisk lending typically suggests there is momentum and confidence in the economy. However given the current weakness, questions remain about the vigor of the recovery.  For banks, this weighed on profit. Net interest income fell 5% across the industry last year – a consequence of shrinking loan portfolios and near-zero interest rates. It was the biggest drop in more than 80 years of record-keeping, according to Mike Mayo, a banking analyst at Wells Fargo.

When the pandemic first hit, companies rushed to draw down credit lines from their banks, fearful they wouldn’t be able to raise money from investors in the bond market. The loans on bank balance sheets spiked.

But government intervened in the form of looser monetary policies and large fiscal stimulus. The Federal Reserve enacted a series of measures that calmed markets and allowed companies to start issuing their own debt again. Congress passed a bill to dole out money to small businesses and households.

Companies rushed to issue bonds to repay the credit lines they drew down. The record-breaking bond boom moved debt from bank balance sheets into the hands of investors. Other companies paid back credit lines because business held up better than expected and they wanted to avoid interest costs.

A deep recession meant that companies weren’t turning to banks for loans to build new warehouses, finance new product development or otherwise spur growth. Some banks even tightened lending standards as they battened down the hatches during the pandemic.

Loan books would have shrunk more if not for government support for small businesses. Banks doled out hundreds of billions of dollars in loans through the Paycheck Protection Program. Those loans have stacked up on bank balance sheets but are slowly being whittled away as the government forgives them.

Americans also used stimulus checks and expanded unemployment benefits to pay down their credit-card balances. Credit-card debt declined sharply through the first nine months of last year, according to data from the Federal Reserve Bank of New York. Low rates propelled a bonanza in the mortgage market, leading to a record year for the home-lending industry. But for banks, the benefit was limited.

What’s more, nonbank mortgage firms grew disproportionately over the past year, picking up market share as banks tightened lending. In the first nine months of 2020, nonbanks made two thirds of mortgages, according to industry research group Inside Mortgage Finance.

Bank executives say they expect loan growth to pick back up in 2021, but the timing depends on the pandemic and the government’s response to it.

Source: Wall Street Journal