ANALYSIS: Federal Reserve Data Indicates The Credit Crunch Is Over, But Who Exactly Is Benefiting?

For all the talk that the U.S. credit crunch is over, it doesn't appear to be over for the average American.

Last week the Federal Reserve announced that banks are now lending more money than they did in late 2008, just before the financial crisis really took hold. Statistics from the Fed in mid-July show that banks had $7.33 trillion in outstanding loans, compared with $7.32 trillion in October 2008, the previous credit peak.

However, statistics also show that loans taken up by consumer lenders are near an all-time low, which raises questions about who, exactly, the credit crunch is over for.

Yes, American banks are lending more, but the current loan-to-deposit ratio is 83.8 percent, the lowest in six years. Compare this with 94.1 percent in 2009 and 100 percent in 2007. In addition, Bloomberg data shows that loans in 2012 amounted to $7 trillion, with only 15 percent being made to individuals.

“This shows that banks are more comfortable in corporate lending,” said Sheetal Kothari, a Frost & Sullivan analyst. “And they are conservative in their lending approach and only lend to consumers with a proven credit history and stable source of income among multiple other criteria. As most individuals are currently not able to qualify for the above criteria, it has been difficult for consumers to obtain loans.”

Historically, American credit crunches are rare and tend not to last very long. In the early 2000s it only took a year for lending to recover; but at five years, the most recent crunch has been the longest in the Fed’s database, which goes back to 1947.

Many analysts have pondered whether it’s the banks that are not lending or the consumer who isn’t looking to borrow. While politicians and members of the public have been quick to blame banks for the post-recession difficulty average people face getting a loan, Kothari says it may have been too easy to get a loan before.

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, ostensibly passed to prevent another financial meltdown, has increased the risk perception of lending authorities because, in part, the servicing of nonperforming loans is now more expensive for banks. Essentially, consumer lending has become a risky business for banks, and they are far happier to lend to corporate entities.

While the ratio of nonperforming loans has declined from 2.2 percent in 2009 to 1.2 percent in 2012, the reserves that U.S. banks must now maintain to deal with bad loans as a percentage of nonperforming loans has shot up 77.4 percent over the same period.

Add to the demands of Dodd-Frank the bigger capital reserve requirements mandated by the Basel III accords of the Basel Committee on Banking Supervision, and it's easy to understand why American banks are less able and perhaps less inclined to loan to consumers.

The upshot of Dodd-Frank, Basel III and bankers' post-recession jitters is that the billions banks received from the Federal Reserve through its three rounds of quantitative easing initiatives -- intended to boost lending and thus aid the recovery -- are in large measure simply going to beef up bank balance sheets.

“These excess reserves will have to be eventually pumped into the U.S. economy,” says Kolthari. “This might cause an unexpected and sharp rise in inflation, which would be followed by an increase in interest rates without any significant growth for the U.S. economy if not done in a phased and well-planned manner.”

There is little doubt that the financial landscape has changed. The Federal Reserve’s most recent survey of lenders indicated that banks are trying to make it easier for consumers to get loans for homes, cars and credit cards, and the ratio of loans to deposits rose for the first time in more than a year, indicating that banks are trying to release money to the public. Although, at only 70 percent, it is still near an all-time low and not great for consumers looking to borrow, especially when one considers that as recently as 2007 banks used to lend 90 percent of their deposits.

However, it might just be that this is the future for banks and, perhaps, it may be a good thing to give people less access to credit if the banks and the economy are to avoid another financial meltdown.