Bank Credit and Money Growth Show ‘Subpar Recovery’

Bank credit and money growth both exhibit typical patterns in the post-Great Recession era; however, the change over the time period is consistent with the pace of a subpar recovery.

This revelation was reported by the Wells Fargo Economics Group in a release Monday, highlighting the two factors as reasons for caution among both businesses and bank lenders.

The report found that commercial and industrial lending by banks have been closely tied to business inventories, and that this relationship has remained in place following the Great Recession. The report found that although lending is still growing, 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," the report said. "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."

Another cautious signal provided by the group’s report is the loan-to-deposit ratio.

Typically, banks will increase the turnover of deposits as the economic expansion grows older, and banks will 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."

However, banks have been more cautious of using deposit growth, and have retained a higher level of deposits relative to loans than in the past.

The Wells Fargo Economics Group notes that banks remain cautious despite the ample supply of liquidity provided by the Federal Reserve—Fed liquidity has grown by 20 to 40 percent  at times during the economic expansion.

The report found, "All three measures reviewed in this note suggest a rather disciplined public and banking system in their deployment of Fed liquidity in the economy."