US loans: growing brood

If the economy is a family, equity represents the grown ups, debt the children. Kids are great - new life and all that. They grow naughty, though, when too many are underfoot. The US has grown fecund. Are congratulations in order? Or is it off to the orphanage again, to dump the worst of the ankle-biters for restructuring?

Rates remain very low, and net interest margins remain slim. Banks are responding by lending more. In October, loans to customers stood at $7tn, according to the St Louis Federal Reserve, about a 10th higher than in 2008, before Lehman Brothers went bust. With the US economy growing robustly (by global standards), more businesses feel confident about investing. Commercial and industrial loans issued by banks have grown nearly 50 per cent since the post-crisis lows of late 2010. Commercial real estate (CRE) loans are growing at a particularly fast pace as banks back new development projects. In the last quarter JPMorgan's CRE loan portfolio grew 13 per cent from a year earlier. The figures at Wells Fargo, Citigroup and Bank of America are also rising, albeit more modestly.

Banks have eased credit conditions for large companies in 19 out of the past 20 quarters, according to Credit Suisse. A US Federal Reserve survey shows that 10.5 per cent of US banks have lowered their standards (giving loans to companies with lower credit scores) for big and midsized groups. Meanwhile, risky leveraged lending has continued to grow despite a regulatory crackdown. All this activity has put regulators on edge. They fear a repeat of the crisis, when all the bawling and dirty diapers took the family to the edge of insolvency. Specifically, the Fed is worried that growing competition between banks to win over new customers will lead many to weaken their underwriting standards and risk management assessments.

Yet, non performing loans have halved since the 2010 peaks. And bad debt charges have fallen to 0.23 per cent in the second half of this year, down from the 2.5 per cent high in the last quarter of 2009, Credit Suisse analysis shows.

Today's banks are better capitalised then they were before the crisis. But high levels of risky debt could undermine those buffers. For the moment, the growing brood looks comfortable enough. But the more it grows, the riskier it becomes.

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