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short essays and reports on the economic issues of the day
2004 ■ Number 10

Why No Business Loan Growth?
David C. Wheelock
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 encouraged
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 percent rate, however, while small banks—
which lend disproportionately 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 conducted 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. ■

Board of Governors of the Federal Reserve System. January 2004 Senior Loan
Officer Opinion Survey on Bank Lending Practices.

C & I Loans at Commercial Banks
Percent Change from Year Ago






Views expressed do not necessarily reflect official positions of the Federal Reserve System.



Years Relative to End of Recession