Since the 2008-2009 financial crisis, U.S. bank lending has been slow to recover and the current loangrowth recovery has lagged the recovery experienced in previous recessions. Under the auspices of theCongressional Research Service, our Capstone team was tasked with investigating how domestic lending practices have changed after the 2008-2009 financial crisis and the underlying reasons for such changes.Our mission was to interview banks from across the country and to identify changes in the amount and composition of lending, along with what factors most affected changes in lending practices. Embedded inthe project was whether any new legislation was hindering recovery of loan growth.We conducted interviews, mostly with senior managers at small and mid-sized community and regional banks (18 in total with representation across 12 states) in order to discuss how they have changed their lending strategy and how specific pieces of regulation/legislation might affect their lending in the future.Our main report findings include:
Retail lending declines while wholesale lending increases:
While the amount of lending has notdeclined, the mix of lending has shifted from retail to wholesale. This is owing to the regulations aimed at consumer protection and also to the perceived relative profitability of making loans tocorporate/wholesale borrowers.
Regulation and macroeconomic factors together curtails lending:
The confluence of macroeconomicenvironment and anticipated new regulations has hindered the amount that banks are willing to loan.From a macroeconomic perspective, low profitability owing to the low rate environment, conservatism by banks and deleveraging by retail and corporate borrowers are all reasons why banks have curtailed lending. The compression of margins banks make on interest income relative to interest paid on depositsand low consumer confidence both play a role in why bank lending has declined while deposits havegrown.
Flat yield curve is shifting duration of lending and investment portfolios
: Expectation that rates willremain low has affected lending in two ways: 1) the average maturity of the loan portfolio has generallyshortened as banks are unwilling to lend longer maturity products at fixed rates; 2) the excess depositsthat banks have are being channeled to investments, and the investment portfolio of a bank has shifted depending on their interest rate risk appetite.
Bank consolidation is likely in the medium term:
Banks expect it to be costlier to operate in the near term with compliance costs and higher capital requirements. The stricter capital criteria will also potentially deter banks from offering certain products owing to higher risk weights attached to suchlending; as such, smaller banks are considering their continued viability in the near term and areconsidering strategic consolidation.
Non-banks still have a niche
: The non-bank lending sector remains active in the corporate financingspace and puts competitive pressures on banks. Also, the risks they bear in the financial system remain anunknown.Our report has uncovered that the weak economic environment and regulations aimed at the too-big-to-fail institutions, but being broadly applied across the banking industry, may adversely affect the smaller