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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Outstanding Loans in US Commercial Banks Jump by $420 Billion in One Week

I thought I was seeing things yesterday.

The Federal Reserve released its weekly numbers on U.S. bank lending. And it looked like there had been some kind of mistake.

Outstanding loans and leases at U.S. commercial banks jumped by a staggering $420 billion in the week ended March 31. An unprecedented leap.

As it turns out, there's a reasonable explanation. It's not that Americans suddenly rushed to take out loans.

The jump was caused by "Financial Accounting Statements No. 166". This new set of rules deals with the way U.S. banks must handle off-balance-sheet vehicles (OBSVs).

US Bank Loans and Credit

Prior to the financial crisis, OBSVs were common. When banks acquired particularly risky assets such as sub-prime mortgages, they would create a special holding company to take possession of these instruments.

Banks themselves could then report a pristine balance sheet, uncluttered by high-risk assets. The banks still owned the OBSVs, and if the assets did pan out they could reacquire them and come out golden. If the risky instruments blew up they could be left where they were, with no one the wiser.

This practice was scrutinized heavily following the financial collapse. Regulators decided (rightly) that banks were using OBSVs to distort their balance sheets, giving investors and clients an inaccurate picture of financial health.

So FAS No. 166 was created to "bring the balance sheets home". As of March 31 of this year, banks were forced to bring all off-balance-sheet assets back onto the books.

A good chunk of these assets were loan portfolios, which caused the massive jump in outstanding loans and leases shown in the chart above.

What are these formerly off-balance items? The majority are consumer credit card loans and similar revolving plans. These account for $330 billion.

This is an important happening for a banking system that's just starting to recover from the financial strains of late 2008 and early 2009. Remember, these newly-acquired assets are the ones formerly considered too risky to carry on the main balance sheet.

Now the high-risk loans are back on the books, whether banks like it or not. We'll see just how risky they turn out to be. If they do go bad, it will add considerable stress to the now-whole balance sheets of America's largest banks.

By. Dave Forest of Notela Resources


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