Disclosures show that some of the largest U.S. banks are starting to increase their lending to businesses, as demand for loans rises and healthier banks seek to grab customers from weaker rivals. After declining steadily for most of the past two years, the amount of commercial and industrial loans held by commercial banks inched upward during the past two months, according to the Federal Reserve. Moody’s Analytics estimates that commercial and industrial lending in the fourth quarter has grown 0.2% from the third quarter, to $1.22 trillion, the first quarterly increase in two years. Moody’s predicts such lending will rise 3% next year.
An uptick in business lending is an optimistic sign for the economy and can help to make the recovery self-sustaining. Such loans likely will be used by businesses to expand their operations, which could lead to new jobs and eventually to increased borrowing and spending by hired workers. Recessions are often greeted by the private sector with pent up demand – businesses don’t spend on anything that is not critical. So, as their property, plant and equipment are exhausted past their useful life, many businesses are saddled with needs to replace them. However, without access to loans, this is often impossible. Until recently, a chronic lack of lending to businesses was seen by economists as one of the obstacles to healthy recovery. Commercial and industrial lending “is the last thing that turns in a business cycle,” said Mark Zandi, chief economist of Moody’s Analytics. Wells Fargo (NYSE: WFC) is telling some customers more credit is available if they need it, and is finding takers; BB&T increased its focus on larger middle-market clients and loan production is up.
Richard Ramsden, an analyst with Goldman Sachs Group (NYSE: GS) noted that lending typically rises toward the end of the year as companies increase inventories, so the recent increase might not be sustained. “The true acid test” will come in early months of 2011.
