Banks are lending again.
After three years of Scrooge-like underwriting following 2008's financial crisis, banks have turned on the spigot, boosting lending at annual rates as high as 8.2 percent since July, according to Federal Reserve statistics.
Lending had fallen from mid-2008 through this year's second quarter, deepening what became the worst recession since the Great Depression. The data seem to allay fears that making banks keep more capital on their books as a cushion against future downturns and loan losses will take away the cash flow businesses need to keep the recovery moving.
Among the reasons: The economy is improving, while smaller banks have positioned themselves to pick up slack left as bigger banks remain cautious, says Stuart Hoffman, chief economist at Pittsburgh-based PNC Financial. The most bullish part of the upturn is that it occurred when banks knew the Fed was preparing for last week's preliminary announcement of tougher new capital standards, he says.
"What the Fed did was well-advertised," Hoffman says. "As for any sudden negative effect on lending, that's not going to happen."
The sharpest improvement has come in business lending, raising hopes that it can spur increased capital investment, the seed corn of business expansions. Commercial and industrial loans grew at an annualized pace of more than 20 percent in August and more than 15 percent in October, the best growth since early 2008. In between, commercial lending dropped 19 percent in 2009 and an additional 9 percent last year.
Even small businesses have seen a difference, says Bill Dunkelberg, chief economist of the National Federation of Independent Business. In a monthly NFIB survey, only 3% of small-business owners say lack of credit is their most important problem, trailing taxes, regulation and still-sluggish demand.
The last one especially is making entrepreneurs wary of borrowing, he says: Only 12 percent think business will be better in six months than it is now.
Small businesses are also missing out on the cheap money that homeowners are seeing, he says, with commercial loan rates above 6 percent.
"Two-thirds of business owners say, 'Who wants a loan?' " says Dunkelberg, who is also chairman of a small Pennsylvania bank. "In thirty years, I've never seen anything like it. The banks all have money to lend, but there's a shortage of eligible customers coming in."
This story first appeared in USA Today.