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Economic Brief
February 2021, No. 21-05
Bank Lending in the Time of COVID
Article by: Huberto M. Ennis and Arantxa Jarque
We discuss the evolution of bank lending during the rst several months of the
COVID-19 pandemic. Large domestic banks and foreign-related banks increased
signi cantly their lending to businesses during these months, much of it through
existing lines of credit. Small domestic banks played an active role in providing
paycheck protection loans. In terms of consumer credit, the stock of banks'
residential mortgage loans did not change substantially, and the amount of bank
credit owing directly to consumers decreased.
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In March 2020, when the COVID-19 pandemic hit the economy, the U.S. banking system was
in strong nancial condition following a decade-long process of recapitalization and
improvements in liquidity planning.1 In the rst several months of the pandemic, banks
were able to provide a signi cant amount of new credit, particularly to rms, according to
weekly data collected by the Federal Reserve on a representative sample of banks. This ow
of credit helped businesses confront what was initially perceived to be a relatively shortlived shock.
In this brief, we provide an overview of bank lending in the United States during those rst
several months of the crisis, using data from the Federal Reserve's "Assets and Liabilities of
Commercial Banks in the United States – H.8" weekly releases.2 We look at the di erent
categories of loans across domestic and foreign-related banks. We also di erentiate
between large and small banks.3 Table 1 presents the basic structure of the banks' loan
portfolios as reported in the H.8 data releases.
In March and April of 2020, banks in aggregate saw a signi cant increase in the demand for
business loans, which led to an increase in their stock of both commercial and industrial
(C&I) loans and other loans, as shown in Figure 1. Loans to nondepository nancial
institutions accounted for about 40 percent of other loans and drove much of the increase
in that category early in the pandemic. Consumer loans, on the other hand, decreased at
the outbreak of the pandemic and have remained relatively low. The beginning of the
pandemic did not a ect the stock of real estate loans signi cantly.
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C&I Loans
The largest increases occurred in C&I loans, which are loans (secured or unsecured) to
business enterprises, including working capital advances and loans to individuals to start a
business. Bank lending accounts for around 20 percent of the total credit extended to rms
of all sizes and is often the only type of credit available to smaller rms. Many rms
borrowed during this time to build up their cash bu ers,4 perhaps because of increased
uncertainty and stress in short-term funding markets.
Figure 2 shows that large domestic banks and foreign-related institutions increased C&I
lending sharply (between 20 percent and 40 percent of their lending during the same week
of the previous year) in early March, and it remained high for a few weeks. Foreign banks
started to decrease C&I lending in mid-April, and large domestic banks started to decrease
it in mid-May. Small domestic institutions increased their lending later, toward the end of
April and the beginning of May, to greater than 45 percent of their previous year’s lending.
For these smaller institutions, the level has remained persistently high. It is important to
keep in mind, though, that their total lending amounts to only about 50 percent of that of
large banks.
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An important mechanism driving the increase in loans to businesses during the early stages
of the pandemic was businesses drawing down existing lines of credit.5 (This also occurred
at the onset of the 2008 global nancial crisis.)6 After the initial spike in credit line
drawdowns, the surge in C&I lending was fueled by participation in the Paycheck Protection
Program (PPP).7 Banks started lending under the PPP on April 13, 2020, and PPP activity
stayed high for several months. The program closed Aug. 8 with more than 5 million loans
for a total of $525 billion lent through 5,460 participating institutions (banks, savings and
loans, as well as other entities). The average loan size was $100,729.
Figure 3 combines H.8 data on cumulative changes in C&I bank loans with data from the
Small Business Administration (SBA) on cumulative changes in PPP loans.8 Once PPP loans
were available, it appears that very few new non-PPP loans were made, and many
outstanding ones were repaid.9 Indeed, there is evidence that once smaller rms had
access to PPP loans, they signi cantly reduced their non-PPP bank loans.10 This evidence
suggests the terms of the government-sponsored loans were more advantageous for small
rms.
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Table 2 looks more closely at changes in C&I lending. At large domestic banks, the increase
in C&I lending in the rst quarter of 2020 ($310 billion) corresponds closely with the drop in
unused credit lines ($234 billion), consistent with the idea that credit line drawdowns were a
major source of increased C&I lending. At smaller banks, unused commitments actually fell
more than the increase in C&I loans during the rst quarter of 2020, perhaps because some
credit lines were canceled or discontinued.
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In the second quarter of 2020, C&I loans by large banks dropped even though large banks
originated $146 billion in PPP loans, which indicates an even more signi cant drop in nonPPP C&I lending. For small domestic banks, the dramatic increase in PPP loans was
commensurate with the increase in C&I loans. Interestingly, by the third quarter of 2020,
when the growth in PPP loans stopped (the program ended on Aug. 8), total C&I lending by
large domestic banks continued to fall, and unused commitments returned (approximately)
to their level before the pandemic started. At smaller banks, C&I lending leveled out, but did
not fall, after PPP lending stopped growing.
Some of the decrease in C&I loans observed during the second and third quarters of 2020
likely resulted from many businesses repaying the loans that originated from lines of credit
in March and April. Repayments on PPP loans, on the other hand, were not very signi cant
during that time. As of Nov. 22, 2020, the SBA website reported that loans totaling $38
billion have been repaid, and loans totaling $83 billion have been submitted for forgiveness.
Another factor that is likely to have in uenced lending trends during this period was that
banks responded by tightening lending standards as the pandemic continued.11
Researchers have established a connection between credit line drawdowns and tighter
term lending: Banks that had their credit lines more intensively tapped early in the
pandemic (typically by large corporations) tightened their term lending to other borrowers
to a greater degree.12 It is also worth noting that the quality of C&I loans in banks’ portfolios
deteriorated noticeably in the second and third quarters of 2020, as reported in the
November Financial Stability Report of the Board of Governors of the Federal Reserve
System, with borrower leverage at historic highs.
Real Estate Loans
As seen in Figure 1, the crisis did not a ect total real estate loans in any signi cant way.
When we disaggregate this category into its two main subcategories, residential and
commercial, and also between large and small domestic commercial banks, we nd very
similar behavior (not shown in the gure).13
This may be surprising given that, on one side, the residential housing sector has been
booming for much of the pandemic, and on the other side, loans linked to commercial real
estate could su er more acutely from the e ects of lockdowns and other governmentimposed restrictions on business activity.14 Such e ects, however, are not evident in these
data — if anything, it seems that the recent stock of residential real estate loans was
relatively sluggish compared with commercial real estate lending.
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Several factors may underpin these patterns. Much of the lending activity on the residential
side was associated with mortgage re nancing, where one loan replaces another.
Furthermore, banks sell a signi cant proportion of the new mortgages that they originate,
and more than half of new mortgages originated year-to-date have been granted by
nonbank originators (recall that the H.8 data only cover depository institutions).15 On the
commercial real estate side, it is possible that weakness in some sectors (hotels, o ces and
shopping centers) is countered by strength in others (construction and warehousing),
leaving the aggregate largely una ected.
Arguably, the main change in real estate lending has been the deterioration of commercial
borrowers’ credit worthiness. This is the natural consequence of weakened consumer
spending in some sectors, which has translated into rental income declines and increased
vacancies, especially in COVID-a ected properties, such as hotels and retail
establishments.16 On the residential side, while mortgage re nancing activity (which tends
to improve the average credit score of borrowers) has been strong due to low interest
rates, a signi cant portion of mortgages also is participating in government-sponsored lossmitigation programs. For more details, see the Financial Stability Report issued by the
Federal Reserve in November 2020.
Consumer Loans
Figure 1 shows that consumer loans fell in March and April and remained low for several
months. To better understand these patterns, we take a more disaggregated look at
consumer loans.
Credit card loans and auto loans are the two main categories of consumer lending. Figure 4
shows that credit card loans decreased at large and small domestic institutions, with the
lion’s share of the dollar-volume decline occurring in large banks. Auto loans made by large
banks also dropped some in March and April but then started growing again.17 Smaller
banks make far fewer auto loans, and their lending in that market has not been a ected
noticeably by the pandemic.
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On the supply side, in both the April and July Senior Loan O cer Opinion Survey (conducted
by the Federal Reserve), banks reported tighter lending standards on all categories of
consumer loans. For example, banks reported reduced credit limits on new credit cards and
increased basic requirements to obtain new cards. Credit standards on auto loans, such as
the maximum loan maturity or the minimum credit score required to obtain a loan,
tightened as well.
Banks also experienced weaker demand for consumer loans, which could have multiple
origins. For example, at the beginning of the pandemic, car sales dropped signi cantly —
partly due to strict lockdowns, increased unemployment and the uncertainty experienced
by prospective buyers.18 Another source of weaker demand is the combination of
restrictions in access to certain services and the signi cant government transfers received
by households. These likely reduced the need to accumulate credit card balances and, in
many cases, even allowed consumers to pay down previously accumulated credit card
debt.19
All Other Loans
This category includes loans from banks to nondepository nancial institutions and all other
loans, such as loans to banks in foreign countries, loans to nance agricultural production
and loans to purchase securities. As seen in Figure 1, the overall pattern for these loans was
comparable to that of C&I loans, although the changes were less abrupt. Most of the sharp
increase in other loans happened early in the pandemic and came from an increase (of
more than 30 percent) in loans to nondepository nancial institutions.20 Much of this
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increase resulted from drawdowns on existing lines of credit and was concentrated in large
banks' and foreign banks' portfolios.21 In this sense, the behavior of other loans resembles
the behavior of C&I loans excluding PPP activity.
Allowance for Credit Losses
Banks are required to put aside funds ("provisions") to cover expected losses on their loans
and securities. The cumulative balance of these provisions is a bank's allowance for credit
losses. Call Report data suggest that banks started increasing their allowances in March.22
This con rms that banks increased their expectations of potential loan defaults. It also
implies that banks will be prepared to withstand these losses, if and when they materialize,
while maintaining their regulatory capital requirements.23
As shown in Table 3, Call Reports indicate that allowances nearly doubled between the
fourth quarter of 2019 and the second quarter of 2020 and remained at through the third
quarter of 2020. Note that out of the $244 billion of credit allowances in the third quarter,
$35 billion — $21 billion at large banks and $14 billion at small banks24 — can be attributed
to the adoption of a new accounting methodology, current expected credit losses (CECL),
that requires more aggressive provisioning. This implies that, out of the cumulative $119
billion increase in allowances through the third quarter of 2020, $85 billion is attributable to
deteriorating loan repayment expectations ($54 billion for large banks and $31 billion for
small banks).
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The generous increases in credit allowances in the rst two quarters of 2020, together with
the government's loan-forbearance programs, likely explain why loan allowances did not
increase further during the third quarter of 2020. Indeed, the New York Fed Quarterly
Report on Household Debt and Finances discusses decreases in bankruptcy and
foreclosure rates during the third quarter of 2020, likely due to the widespread
implementation of borrower assistance programs and the provisions of the CARES Act that
extended moratoriums for mortgages and protected student loans.
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If the crisis lasts longer than expected, or if some of the government support ends relatively
soon, it is possible that banks would need to further increase allowances. In turn, if
delinquency rates increase due to a prolonged crisis, these allowances would be needed to
cover the expected increases in bank charge-o s.
Conclusion
We have discussed the evolution of bank lending during the rst several months of the
pandemic. Our analysis is based mainly on weekly data published by the Federal Reserve,
which includes information on the size and the type (domestic or foreign) of the banks
making loans.
Banks played a signi cant role in providing commercial credit during this di cult time. We
showcase in our analysis how activity at large banks and foreign banks di ered from
lending by smaller banks. The former provided signi cant amounts of credit during the rst
few weeks of the pandemic, much of it as a result of demands associated with existing loan
commitments (lines of credit). The latter played a more signi cant role in providing PPP
loans to small businesses.
Regarding household credit, we show that banks' portfolios of residential mortgages did
not change signi cantly, and there was actually a decrease in the amount of credit owing
through banks directly to consumers. This latter situation likely resulted from a
combination of demand and supply factors, with consumers using extra savings to cancel
credit card debt and banks becoming more conservative in the terms they were willing to
o er.
Overall, banks encountered the pandemic crisis in good nancial positions, with plentiful
capital and liquidity,25 thus well positioned to expand their lending. As we have seen in this
note, this expansion required signi cant shifts in the size and composition of bank loan
portfolios.
Huberto M. Ennis is a group vice president for macro and nancial economics, and Arantxa
Jarque is a senior policy economist in the Research Department of the Federal Reserve Bank
of Richmond. They would like to thank Kyler Kirk for excellent research assistance and
Steven Block, Je Gerlach, Richard Gilbert, Ned Prescott, Jessie Romero, Zhu Wang, Alex
Wolman and Russell Wong for comments and discussions on this topic.
1
Randal K. Quarles, "What Happened? What Have We Learned From It? Lessons From COVID-19
Stress on the Financial System," Speech at the Institute of International Finance, Washington,
D.C., October 15, 2020.
/
2
The H.8 weekly releases estimate aggregate data for all domestically chartered commercial
banks and U.S. branches and agencies of foreign banks from a weekly survey of a representative
sample of banks. Estimates for the entire U.S. banking industry are constructed by benchmarking
the survey data to the Call Report data led by all banks at the end of each quarter. Our sample
period includes data through November 2020.
3
We follow the H.8 de nition of "large" — the 25 domestic banks with the most assets, according
to Call Report data from the quarters before the measurement weeks. As of December 2013, the
asset-size threshold for inclusion in the large-bank panel was approximately $85 billion.
4
Viral V. Acharya and Sascha Ste en, "The Risk of Being a Fallen Angel and the Corporate Dash
for Cash in the Midst of COVID," Review of Corporate Finance Studies, November 2020, vol. 9, no.
3, pp. 430–471.
5
Banks report their lines of credit (unused loan commitments) in the quarterly ling of balance
sheet data required by regulatory agencies, i.e., the Call Reports. Most business lines of credit,
when drawn down, become C&I loans. See Gabriel Chodorow-Reich, Olivier Darmouni, Stephan
Luck and Matthew Plosser, "Bank Liquidity Provision Across the Firm Size Distribution," Federal
Reserve Bank of New York Sta Report No. 942, October 2020, for evidence that the increase in
non-PPP loans to businesses during the rst and second quarters of 2020 came almost entirely
from drawdowns by large rms on precommitted lines of credit. Also, see Lei Li, Philip E. Strahan
and Song Zhang, "Banks as Lenders of First Resort: Evidence From the COVID-19 Crisis," Review of
Corporate Finance Studies, November 2020, vol. 9, no. 3, pp. 472–500; Acharya and Ste en, "The
Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID;" and Daniel
L. Greenwald, John Krainer and Pascal Paul, "The Credit Line Channel," Federal Reserve Bank of
San Francisco Working Paper No. 2020-26, November 2020.
6
See, for example, Victoria Ivashina and David Scharfstein, "Bank Lending During the Financial
Crisis of 2008," Journal of Financial Economics, September 2010, vol. 97, no. 3, pp. 319–338. Early
on during the health crisis, before much data was available about changes in bank credit or
government emergency programs, Viral V. Acharya and Sascha Ste en, "'Stress Tests' for Banks
as Liquidity Insurers in a Time of COVID," Voxeu.org, March 22, 2020, used data from
non nancial rms' credit line drawdowns during the 2008 crisis to estimate an expected $264
billion increase in C&I loans in response to the pandemic. Based on this estimate, the pace of
credit line drawdowns recently was much more pronounced than in 2008. For the original study
of credit line drawdowns during the 2008 crisis, see Tobias Berg, Anthony Saunders, Sascha
Ste en and Daniel Streitz, "Mind the Gap: The Di erence Between U.S. and European Loan
Rates," Review of Financial Studies, March 2017, vol.30, no. 3 pp. 948–987.
7
The PPP was created by the CARES Act to incentivize small businesses with fewer than 500
employees to keep workers on payroll during the pandemic. Under this program, a participating
nancial institution makes a two-year, uncollateralized loan at a 1 percent interest rate to a
quali ed small business; the Small Business Administration provides guarantees and possibly
forgiveness of the loan if certain conditions are met. While other nonbank nancial institutions
could o er PPP loans, banks played a signi cant role in the program. See João Granja, Christos
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Makridis, Constantine Yannelis and Eric Zwick, "Did the Paycheck Protection Program Hit the
Target?" National Bureau of Economic Research Working Paper No. 27095, Revised November
2020.
8
Note that the SBA reports net loan balances through Aug. 8, 2020.
9
Note that PPP loans are not exclusively granted through banks, and hence the C&I excluding
PPP loans is a lower bound on non-PPP C&I lending. Banks report PPP loans as a special item in
their Call Reports, but not on the weekly H.8 survey. Based on Aug. 8, 2020, statistics provided by
the SBA and the Call Report data on PPP loans, nonbank institutions may have granted between
$18.9 billion and $35 billion out of the total $525 billion.
10
Gabriel Chodorow-Reich et al. (2020).
11
See the April and July 2020 Senior Loan O cer Opinion Survey (SLOOS) conducted by the
Federal Reserve.
12
Greenwald, Krainer and Paul (2020).
13
Foreign-related institutions do not have large portfolios of real estate loans, with under $100
billion as an aggregate. Furthermore, as with the other types of banks, this component of foreign
banks' portfolios was not signi cantly impacted by the pandemic.
14
On the residential side, for example, the New York Fed Quarterly Report on Household Debt
and Credit states that, in the third quarter of 2020, mortgage debt increased by $85 billion, a
good pace of growth. The volume of mortgage originations, which includes re nances, was
especially strong, with over $1 trillion in loans.
15
See Ben Eisen, "Mortgage Originations Are on Pace for Best Year Ever," WallStreetJournal.com,
December 10, 2020.
16
See, for example, Jim Dobbs, American Banker, "Hotel Lending: Banks in 'Race Against Time,'"
November 23, 2020.
17
Much of the growth in lending to consumers, including residential mortgages and auto loans,
has been concentrated in the prime credit segment, with almost no growth in lending to less
creditworthy borrowers, according to the Fed's Financial Stability Report of November 2020.
18
Zhu Wang, "Coronavirus and Auto Lending: A Market Outlook," Federal Reserve Bank of
Richmond Report on the Economic Impact of COVID-19, April 16, 2020.
19
This situation has been widely reported in the business press. See, for example, Robert
Armstrong, "Bank Credit Card Pro ts in Question as U.S. Consumers Pay Down Debt," Financial
Times, November 15, 2020.
20
A possible source for this increase is borrowing by nonbank mortgage originators, who fund
their origination with warehouse lines of credit from large banks, which they then pay o when
they sell the loans in the securitization market.
21
See, for example, the Federal Reserve's May and November 2020 Financial Stability Reports.
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22
The H.8 data tell a similar story, although they need to be interpreted with caution due to
changes in accounting methodology over the time period.
23
The increase in allowances from the start of the pandemic through the third quarter of 2020
amounts to approximately 0.5 percent of total assets. Note that, since PPP loans are guaranteed
by the SBA, banks do not need to provision for these loans.
24
Upon adoption, banks provided in their Call Reports the one-time impact that the new CECL
accounting rule had on their credit allowances (both for loans and for other securities that were
not subject to provisions under the old accounting methodology).
25
Li, Strahan and Zhang (2020).
This article may be photocopied or reprinted in its entirety. Please credit the authors,
source, and the Federal Reserve Bank of Richmond and include the italicized statement
below.
Views expressed in this article are those of the authors and not necessarily those of the Federal
Reserve Bank of Richmond or the Federal Reserve System.
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