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March 17, 2014

Economics Group
John E. Silvia, Chief Economist
john.silvia@wellsfargo.com (704) 410-3275

Zachary Griffiths, Economic Analyst


zachary.griffiths@wellsfargo.com (704) 410-3284

Bank Credit and Money in the Post-Great Recession Era


Bank credit and money growth have both exhibited a very typical cyclical pattern in the post-Great Recession era, but the amplitude of that pattern is consistent with the pace of a subpar recovery. Business Lending and Inventories: A Basic, but Subdued, Cycle Commercial and industrial (C&I) lending by banks has historically been closely tied to business inventories and that relationship has remained in place following the Great Recession (top graph). This comes despite all the changes in bank regulation and private business and bank strategies due to the recession. For this recovery, business inventory growth peaked in 2011 and C&I loan growth peaked in late 2012. Lending is still growing but the pace of growth has slowed. While the pattern of lending/inventory build remains the same, the amplitude of growth in both series remains more modest compared to the 2006-2008 period. This likely reflects greater caution on the part of both businesses and bank lenders, and is one underlying explanation for the subpar pace of the overall economic recovery. A Break from History: The Loan-to-Deposit Ratio Another signal of caution in the bank credit process is the sharp decline in the loan-to-deposit ratio in the current recovery. This is in sharp contrast to the rise in the ratio evidenced in the middle graph during the 1987-1989, 1994-2000 and 2006-2008 periods. Typically, banks will increase the turnover of deposits as the economic expansion ages as banks seek new lending opportunities. Deposits are squeezed down to generate loans and thereby increase the credit multiplier in the economy for any given growth in deposits. But this cycle has been clearly different. Banks have been far more cautious in their use of deposit growth and have retained a high level of deposits relative to loans than in the past. This more cautious loan-to-deposit ratio reflects a greater caution on the part of banks and helps explain why the pace of the recovery remains subpar this far into the current expansion. Money Growth: Modest Gains Despite Fed Liquidity One result of bank caution has been the modest growth in the money supply despite the ample supply of liquidity provided by the Federal Reserve. The rapid growth in Federal Reserve liquidity, measured by the growth of the monetary basea standard measure of Fed liquidity employed by most economistshas grown by 20-40 percent at times during the current economic expansion. Yet money growth peaked at 10 percent in only Q1 2012 this cycle, and grew just 6.3 percent over the last year (bottom graph). The ratio of money growth to the monetary base is termed the money multiplier and the very low values for the multiplier reinforces the message that banks, as well as the public, remain cautious on the use of their funds. All three measures reviewed in this note suggest a rather disciplined public and banking system in their deployment of Fed liquidity in the economy.
30% Year-over-Year Change: Feb @ 6.3% 3-Month Annualized Rate: Feb @ 7.7% 25% 25% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% C&I Loans: Feb @ 9.2%

C&I Lending and Business Inventories


Year-over-Year Percent Change 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

Business Inventories: Jan @ 3.9% -25% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Loan to Deposit Ratio


At Commercial Banks in the United States 110% 105% 100% 95% 90% 85% 80% 75% 70% Loans-to-Deposit Ratio: Feb @ 75.1% 65% 1974 65% 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 110% 105% 100% 95% 90% 85% 80% 75% 70%

Total M2 Money Stock


At Commercial Banks 30%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0%

-5% 1973

-5% 1978 1983 1988 1993 1998 2003 2008 2013

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Wells Fargo Securities, LLC Economics Group


Diane Schumaker-Krieg John E. Silvia, Ph.D. Mark Vitner Jay H. Bryson, Ph.D. Sam Bullard Nick Bennenbroek Eugenio J. Alemn, Ph.D. Anika R. Khan Azhar Iqbal Tim Quinlan Eric Viloria, CFA Michael A. Brown Sarah Watt House Michael T. Wolf Zachary Griffiths Mackenzie Miller Blaire Zachary Peg Gavin Cyndi Burris Global Head of Research, Economics & Strategy Chief Economist Senior Economist Global Economist Senior Economist Currency Strategist Senior Economist Senior Economist Econometrician Economist Currency Strategist Economist Economist Economist Economic Analyst Economic Analyst Economic Analyst Executive Assistant Senior Admin. Assistant (704) 410-1801 (212) 214-5070 (704) 410-3275 (704) 410-3277 (704) 410-3274 (704) 410-3280 (212) 214-5636 (704) 410-3273 (704) 410-3271 (704) 410-3270 (704) 410-3283 (212) 214-5637 (704) 410-3278 (704) 410-3282 (704) 410-3286 (704) 410-3284 (704) 410-3358 (704) 410-3359 (704) 410-3279 (704) 410-3272 diane.schumaker@wellsfargo.com john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com sam.bullard@wellsfargo.com nicholas.bennenbroek@wellsfargo.com eugenio.j.aleman@wellsfargo.com anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com tim.quinlan@wellsfargo.com eric.viloria@wellsfargo.com michael.a.brown@wellsfargo.com sarah.house@wellsfargo.com michael.t.wolf@wellsfargo.com zachary.griffiths@wellsfargo.com mackenzie.miller@wellsfargo.com blaire.a.zachary@wellsfargo.com peg.gavin@wellsfargo.com cyndi.burris@wellsfargo.com

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