One of the more bullish "fundamental" theses discussed in recent weeks, perhaps as an offset to the documented record collapse in mortgage origination [9]- because without debt creation by commercial banks one can kiss this, or any recovery, goodbye - has been the so-called surge in loans and leases as reported weekly by the Fed in its H.8 statement [10]. Some, such as the chief strategist of retail brokerage Charles Schwab, Liz Ann Sonders, went so far as to note that this is, to her, the "most important chart in the world [11]."
This is indeed notable because as we have shown in the past, for nearly five years, total loans and leases within the US commercial system remained virtually unchanged from a level of about $7.3 trillion, first attained when Lehman filed for bankruptcy. And it doesn't take a PhD in monetary theory to figure out that this lack of credit revival (alongside the historic collapse in shadow bank liabilities) is precisely what the Fed's endless QE programs had been, at least on paper, trying to avert.
Of course, if the data represented by the Fed which supposedly is a sample of call reports distributed to commercial banks, is accurate, then it would be a welcome development to the economy as it would indicate that finally lending conditions are easing, and demand for money is rising at the retail level as opposed to just the institutional (where it is merely used to buy risk assets). In other words, it would slowly allow the elimination of the Fed's artificial conditions and removal of the central-planning umbrella.It would also indicate inflation may finally be returning to the economy (as opposed to just food and energy prices).
And logically, since the Fed's data is sourced by the banks themselves, what the Fed is representing and what the banks report quarterly should be in rough alignment.
Unfortunately it isn't.
Now that the Big 4 commercial banks - JPM, Wells, Bank of America and Citi - have reported their March 31 numbers, we can compile not only what the total amount of outstanding loans was as of the end of Q1, but more importantly, what the change in the quarter was. After all, for Liz Ann Sonders it is this change that is "the most important" data in the world.
What we learn is that the Top 4 banks held some $3.14 trillion in loans and leases at March 31.
So far so good. But what is not so good is that the change of this number in the first quarter is not an increase even remotely comparable to what the Fed makes those who read its H.8 statement believe it is. Quite the opposite.
As the chart below shows, in the first quarter, of the Big 4 banks, only Wells Fargo reported an increase - a tiny $4 billion to be exact - in its loans and leases portfolio. All the other banks... saw a decline in their loans and leases holdings.
We show this on the chart below.
[12]
We admit that we have taken a sampling of banks, even if it is the four biggest banks in the US, those which account for 42% of all loans outstanding, and a complete analysis would require complete data from not only regional banks, but also foreign banks operating in the US. However, if the four best capitalized banks, flush with trillions in Fed excess reserves, are indicating on their own that they are nowhere near lending at the level the Fed is telegraphing, and are in fact reducing their loans outstanding, why should the others be more generous in their lending activities?
Which brings us to the question: is the Fed fabricating loan level data?
Or, less dramatically, is the Fed merely once again goalseeking its weekly "data" to account for a world in which deposit expansion is no longer running at the pace seen in pre-taper days. It would be logical that the one "plug" the Fed would adjust to balance off its model is to boost lending activity, which would explain why the Fed is suggesting lending is surging.
Unfortunately, lending is not only not surging, it is contracting, if only among the Big 4 banks in the first quarter.
So whether the Fed has an ulterior motive, or is simply fudging for a lowered Fed reserve creation growth trendline, we believe the people deserve an answer: just what is really going on here?
Source: Fed [13], BofA [14], JPM [15], Wells [16], Citi [17] [17]