You Won't Believe It, But Banks Are Actually Starting To Lend Again

Bank Credit: Loans And Leases

Photo: Northern Trust

In the past two months, for the first time since the financial crisis, the total amount of securities and loans on the books of US banks has actually started to expand again.What’s more, in the past three weeks, the total amount of loans and leases made by banks (as opposed to securities) has started to grow.

This is important, because bank credit is closely tied to the performance of the economy: Generally, when bank credit expands, the economy grows, and when bank credit shrinks, the economy stalls. 

So the turnaround in bank credit could bode well for the economy at large, in 2011 and beyond.

Northern Trust economists Asha Bangalore and Paul Kasriel have been on top of this trend since it began in July (we previously wrote about it here). Yesterday, Asha published an update noting the recent growth of not just the amount securities banks are holding (Treasuries, et al), but loans and leases–the life-blood of the economy.

The growth (or shrinkage) of bank credit is correlated with the growth (or shrinkage) of the economy. Here, the growth of bank credit (red line) is charted against final sales (blue line), which is a component of GDP

Source: Northern Trust

Bank credit increased in July and August--the first two-month period in which this has happened since the financial crisis

Source: Northern Trust

Source: Northern Trust

Source: Northern Trust

Source: Northern Trust

If past is prologue, this could (eventually) be very good news for the growth of the economy

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