US Credit Expansion?

Following yesterday's post regarding Canadian bank lending, a commenter directs me to the following chart of total bank credit for all US banks. He notes that lending is still increasing in spite of the credit crisis.


It is interesting that lending, in aggregate, always increases - even through severe recessions (early 70's and 80s). However, the most interesting thing to me is the anomalous behaviour of credit in the current recession. The data shows a dramatic flattening of credit followed by a sudden spike. What could explain the behaviour of this data?

In response to the "credit crisis is a myth" hypothesis, researchers at the Boston Federal Reserve note (convincingly) that the recent changes in aggregate loan data can in part be explained by the fact that banks used to securitize loans but are now increasingly being forced to bring loans onto their balance sheets:

During crises, bank balance sheets expand for a number of reasons. First, one consequence of the credit crisis is that loan "securitization," the business of packaging various loans (home, business, auto and other) into assets for investors, has become more difficult. Accordingly, banks have had to keep the loans.

The authors further note that weak financial conditions mean more companies tapping existing lines of credit:

Second, during this and other times of financial weakening, companies increasingly rely on their existing loan commitments and lines of credit. This is because general liquidity dries up and commercial paper markets become strained.

This could explain why we are currently seeing increased loan volume in spite of bank failures and a massive build-up of reserves. The entire article is worth reading: http://www.bos.frb.org/bankinfo/qau/wp/2008/qau0805.pdf