David C. Wheelock

English

Research Papers in Economics

May 2004 MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
Why No Business
Loan Growth?
A
lthough the most recent U.S. recession officially
ended two-and-a-half years ago, in November
2001, the volume of commercial and industrial
(C&I) loans made by U.S. commercial banks has continued
to fall. This protracted decline is similar to the pattern
that followed the recession of 1990-91, when analysts
concluded that borrowers faced a “credit crunch” and Fed
officials commented that “financial headwinds” were
restraining U.S. economic growth. 
The chart plots the year-over-year growth rate of C&I
loans during the 36 months before and 36 months after
the ends of the 1990-91 and 2001 recessions (data for the
2001 recession are through February 2004). C&I loan
volume fell for nearly three years following the end of
the 1990-91 recession. Similarly, since November 2001,
C&I loan volume has declined at an average annual rate
of more than 6 percent.
Are the reasons for the declines in C&I loans following
each recession the same? As a whole, U.S. commercial
banks came out of the 1990-91 recession in weak condition,
characterized by low capital-to-asset ratios, low profit rates,
and high ratios of nonperforming loans to total loans.
Consequently, banks had relatively little ability to increase
loan volume. 
U.S. banks were in much better shape at the end of
the 2001 recession. Banks averaged a return on assets of
1.13 percent in 2001, as opposed to 0.52 percent in 1991.
Average bank capital ratios were also higher at the end of
2001 than at the end of 1991—9.06 versus 6.74 percent—
and the average nonperforming loan ratio of U.S. banks
was lower at 1.41 percent versus 3.71 percent in 1991. The
strength of U.S. banks coming out of the 2001 recession
suggests that falling commercial loan volume has not been
the result of banks’ inability to lend. 
In contrast to the previous post-recession experience,
when the volumes of all types of bank loans declined,
consumer and real estate loans have increased since the
end of the 2001 recession. Real estate loan growth was
especially rapid in the second half of 2002 and first half
of 2003, when long-term interest rates, including mortgage
rates, were falling. 
Although declining long-term interest rates increased
the demand for mortgage loans, they probably contributed
to lower demand for business loans. Falling rates encour-
aged corporations to replace short-term bank loans with
long-term debt issued in capital markets. Some evidence
for this interpretation is reflected in the difference in C&I
loan growth rates for small and large banks. Between
November 2001 and February 2004, C&I loans from
domestic U.S. banks fell at an average annual rate of 6.2
percent. C&I loan volume of large banks fell at a 11.0 per-
cent rate, however, while small banks—which lend dis-
proportionately to small firms that lack access to capital
markets—experienced an average 6.5 percent increase in
C&I loan volume. Thus, the evidence suggests that a lack
of demand, rather than an inability of banks to lend,
explains much of the decline in C&I loan volume since
2001. A quarterly survey of senior bank loan officers con-
ducted by the Federal Reserve found that domestic U.S.
banks saw an increase in C&I loan demand during the
fourth quarter of 2003, the first such increase registered
by the survey since early 2000.1 The absence of constraints
on the ability of banks to lend suggests that C&I loan
volume will increase if loan demand continues to pick up.
—David C. Wheelock
1 Board of Governors of the Federal Reserve System. January 2004 Senior Loan
Officer Opinion Survey on Bank Lending Practices. 
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/.
Available on the web at research.stlouisfed.org
–10
-5
0
5
10
15
–3 –2 –1 0 12 3
Percent Change from Year Ago
Years Relative to End of Recession
C & I Loans at Commercial Banks
2001
1990–91
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Why no business loan growth?

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Why no business loan growth?

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