It Was No Grilled Cheese

Story Highlights:

• The House Financial Services committee asked commercial banking's top execs Wednesday why banks aren't lending the money loaned to them by the feds last fall.
• Commercial bank lending, in general, grew pretty consistently throughout the 2007 and early 2008 "credit crunch" and even the fall financial panic.
• Corporate, securitized, and interbank lending, however, fell dramatically last year and the longer these markets are stuck, the more dire the economic fallout.
• Credit markets have a way to go before they're back to normal, but there have been some encouraging signs lately.

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Some things are tasty grilled—cheese for instance. A prominent panel of bank CEOs? Maybe less so. Nevertheless, the House Financial Services committee grilled top commercial banking execs Wednesday. Their chief concern? Why banks aren't lending the money lent to their firms by the feds last fall—a widely cited TARP shortcoming.

Well, truth be told, commercial banks have continued to lend. In their testimony to Congress, JP Morgan's Jamie Dimon and Wells Fargo's John Stumpf said their banks actually increased lending in the fourth quarter. In fact, Wells Fargo's loans to students, businesses, farms, and commercial real estate increased by double digits. And overall commercial bank lending grew pretty consistently throughout the 2007 and early 2008 "credit crunch" and even the fall financial panic.

If commercial bank lending continued to grow, how can it be that credit markets contracted severely? Well, simply, modern finance is a pretty complicated beast. Individuals and businesses choose from a multitude of options when loaning or borrowing funds—confusing as these many mechanisms can be, they ultimately make the system more efficient at distributing dollars and risk. So although commercial bank lending is the most visible and familiar form of lending, loans on banks' balance sheets comprise only about 22% of overall credit. Much of the credit extended in recent years has been packaged up and sold to investors in vehicles like securitized debt or corporate bonds. The former virtually disappeared last year, while the latter slowed significantly. Neither outcome is too surprising, considering investor appetite for anything but the safest sovereign debt hit a wall in 2008.

Beyond corporate and securitized lending, interbank lending is another key component of healthy credit markets not encompassed by commercial bank lending. Banks need to lend to each other to maintain internal stability, and like securitization and corporate debt markets, interbank lending froze last fall too. With counterparty risk high and unpredictable government interventions at every turn, no bank was willing to put their money on the line.

As the debate continues to center around commercial bank lending volume, investors should pay attention to other types of lending too. The longer these markets are stuck, the longer the economy could flounder. And though credit markets have a way to go before they're back to normal, there have been some encouraging signs lately. Given the enormous wall of monetary stimulus that's been pushed into the financial system, small improvements in credit conditions can yield big benefits. (But don't expect Congress to grill anything tastier than executives for a while.)