Loan Growth Slides Precipitously in Commercial Banking
Conflicting indicators characterize the banking industry’s prospects in the immediate future. Although consumer lending and volume of personal loans recently increased in the fourth quarter of 2016 based on the rise of marketplace lending, there’s been an abrupt decline in commercial lending. Many analysts believe that a healthy commercial loan industry is critical to global economic growth, but a report at Realmoney.thestreet.com states that commercial lending dropped $50 billion dollars within the last two weeks in early 2017.
The report found that total bank credit fell by $37 billion to $12.44 trillion, and the critical year-to-year growth rate fell to 6.26 percent, which is the slowest growth rate posted in the past 27 months. This trend troubles many economists because commercial and industrial loans are growing at the slowest pace in the past three years. Analysts worry that this downturn could halt the economic recovery. The results could indicate economic stagnation or even early warning signs of a global recession.
The big banks are doing well, however, and many analysts expect the market to rebound after Trump takes office. Trump has promised tax cuts, deregulation of the banking industry and other pro-business reforms. Money.cnn.com reports that Steven Mnuchin, Trump’s choice for Treasury, plans as his top priority to “strip back parts of Dodd-Frank that prevent banks from lending.” Mnuchin also plans to bolster regional banks to stimulate growth of small-to-medium-sized businesses.
Declining Commercial Loans Could Indicate Trouble for the Economic Recovery
Understanding banking practices is critical for making any kind of investment decision. When commercial and investment banks experience slow or negative growth, the economic consequences can be dramatic. During the years between 1933 and 1999, it was easy to identify consumer, investment and commercial banks because they were defined by the Glass-Steagall Act.
The act was effectively repealed in the late 1990s, so the differences between commercial, investment and consumer banking have become blurred. Commercial banks now offer a suite of consumer services such as:
- Accepting deposits
- Lending money
- Processing payments
- Renting safety deposit boxes
- Issuing bank drafts and checks
- Brokering insurance services
- Issuing credit and debit cards
- Providing investment advice
Despite expanded services, commercial loans remain the bread-and-butter revenue generators for these institutions. Although there are major global and regional commercial banks, thousands of smaller commercial banks throughout the United States and the rest of the world drive economic growth. These banks must be successful at drawing capital and making loans, or they could fail. Global economic health depends on a healthy and dynamic commercial banking industry.
Economists are troubled over the decrease in commercial loans because the global financial sector is recovering from the worst crisis in 80 years. In the United States and other countries, tighter regulation and burgeoning debt worry economists. Banks in emerging economies are doing well, but that could further reduce business for established commercial banks. Banks also face challenges from alternative lenders, peer-to-peer lending networks and crowdsourced funding for entrepreneurs.
The global economy also generates risks to traditional commercial banking practices. For example, regulations are usually national, but financial markets are global. Any country’s regulatory authorities could hamper its banking industry and get in the way of competitive best practices. In the United States, President Trump has vowed to deregulate the industry so that it can operate based on global business trends.
Chinese Economy Directly Influences Commercial Loans and Leases
Chinese banking directly affects the global economy in multiple ways. Thebalance.com reports that China’s economic output–$21.27 trillion in adjusted dollars in 2016–makes it the world’s largest economy. The United States is second at $19.1 trillion, and the European Union is third at $18.5 trillion.
Reuters.com reports that Chinese banks are also experiencing milder-than-expected growth and increasing bad loans that recently reached an 11-year high. The percentage of bad loans in China is expected to triple over the next two years and could climb as high as 6.6 percent by the end of 2018. As the world’s biggest exporter, bad loans and slower loan growth mean reduced economic output, increased debt and other economic challenges that could stifle global economic growth.
China has cut interest rates six times since the end of 2014, and further cuts are sure to affect the commercial global banking industry. The government has taken some debts to shore up the major banks with such initiatives as debt-to-equity swaps. The government can’t solve the bad debt problem now because trying to reduce bad debt loans would further reduce growth rates for commercial banks. The results of the Chinese commercial lending slowdown are apparent throughout the global economy.
Commercial Loans Slow at U.S. Regional Banks
Some of the world’s largest banks advanced during the third quarter of 2016 according to a report posted at Smartbusinessfunder.com. Morgan Stanley reported a net gain in income of 57 percent. However, regional banks have experienced declining profits in both the third and fourth quarters of 2016 in both short-term and long-term commercial loans. Some regional banks have managed to report earnings increases, but these are generally the exception to banking trends.
Many analysts fear that sluggish growth in commercial loans could indicate severe economic problems in the immediate future. The markets have been extraordinarily volatile, and political surprises have compounded investor fears despite the fact that businesses are optimistic over Trump’s election to the U.S. presidency and his recent promise to introduce a major overhaul in taxes and to deregulate the financial industry. Theguardian.com recently reported that Trump would introduce a “phenomenal” tax plan by early March of 2016.
Another favorable economic indicator is the increase in marketplace loans, which is driving the recovery of the personal loan industry. Orchardplatform.com reports that the marketplace lending sector–led by peer-to-peer lending–increased from $153 million in 2010 to more than $12 billion in 2015. P2P lending also increased substantially in the fourth quarter of 2016 while commercial loans and leases fell dramatically.
Emerging Markets and Consumer Lending: Are They Enough?
Financial analysts disagree sharply on the economy, and market volatility over the last few years confirms this uncertainty. The demand for capital is traditionally linked to global economic growth, and the increase in marketplace lending, while favorable, isn’t viewed as significant enough to fuel global economic growth. Mckinsey.com reports that savings are down, capital is in short supply and capital costs are rising.
On the positive side, shifting investor strategies, creative financing arrangements and growing infrastructure from emerging markets are leading the rebound from the 2009 recession. Worldbank.org reports that emerging and developing markets, or EMDEs, are leading the recovery and expected to grow by 4.2 percent in 2017. Find out more about commercial loan growth and the global economy at the Personal Money Store.