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One of the most consistent inhibitors as far as the economic recovery is concerned has been the lack of credit. The collapse of the financial community presaged the recession, and it has taken the banking system a long time to sort through the damage. There remains much to be done to correct the mistakes, and there are still close to 1,000 banks being closely monitored by the FDIC. However, there evidence has emerged that some banks are getting back in the game in a meaningful way.

It remains a very different world than existed during the boom, and that is a good thing. The encouraging part is that there now seems to be some willingness to make loans to well-run companies that want to expand. Without access to this money, there would be little opportunity for business to grow. Without that growth, there is not much progress on the job front.

According to the latest data from Moody's Analytics, the growth in loan activity was 0.2% in the third-quarter. That is not exactly opening the flood gates, but it is the first gain in more than two years. The expectation is for 3% growth in 2011, and that will go a long way towards pushing the anemic recovery towards a period of real expansion. Traditionally, the last thing to improve in the course of economic recovery is commercial lending, and the last recession has been harsher on banks than in the past. Not only have the banks had to worry about the viability of the companies that are coming to them for loans, they are deeply concerned about their own viability. Many continue to carry a great deal of bad debt. The number of bank failures in the last few years rivals numbers posted during the savings-and-loan debacle from a few decades ago, and there will be more falling before the year is out.

The best part of this expansion is that much of the activity is centered on middle-market and small business. The rate of lending to the companies worth between $10 million and $500 million has increased by about 7%, and small business lending has spiked by 40% in some banks. The levels remain far below those of just four or five years ago. Still, the trend is much better than it has been since the collapse in 2008.

Analysis: There are several factors that will mitigate against another big boom in lending. The most reckless of banks failed and are no longer part of the scene. Those banks that remain are chastened and are under far more scrutiny from the government and from their own shareholders. There is just less risk tolerance than in the past. The companies that are coming to the banks are different as well. There are waves of applicants that are desperate to stay alive and their chances are nil. But those that have the credit quality to get a loan are also planning to borrow far less. Many of them have more cash than in the past, and most of them have pretty modest expectations as far as the coming year is concerned. The hope in the financial community is that lessons were learned. However, if the past is any indication, too many of those lessons will be forgotten and too soon.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief

 

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