The sharp slowdown in commercial and industrial lending over the last six to nine months is worrisome. But there is more to this story than meets the eye.
Some believe that increased bank regulation and tighter supervision is behind the lending slowdown. Yet that assessment misses some important details. Indeed, there is no “smoking gun” in the data linking the decline in the annual C&I loan growth rate to either passage of the Dodd-Frank legislation or the Federal Reserve’s progressive tightening of its stress-testing requirements.
Digging deeper reveals two more nuanced takeaways. First, it appears a pullback in overall business investment by potential borrowers is a more likely reason for the decline in C&I loan growth. Secondly, evidence does point to the tighter regulatory environment having an effect on C&I lending. But that effect has more to do with the types of commercial loans banks have made, not overall loan growth.continue reading »