U.S. Flow-of-Funds Give Mixed View of Credit Recovery

The Federal Reserve flow-of-funds data for Q1 2012, published yesterday, continue to show the uneven expansion of credit markets which has characterized this entire post-recession period. Borrowing did pick up in Q1 to $1.558 trillion (SAAR) from $1.249 trillion in Q4 2011, which in turn was revised up from $1.132 trillion reported in March. The Q1 figure equals just over 10% of GDP, up from 8.2% in Q4. This is the strongest relative performance since late 2008, as the financial collapse was reaching a climax. But it remains well below a long-term average of almost 19%. In fact, before the implosion of 2008-10, when there were net paydowns of debt in this country, credit market net borrowing had dipped below 10% of GDP in only 15 quarters since 1962 (50 years ago!) and only three of those occurred after 1975. Total credit market debt outstanding stood a mere 1.8% above a year ago on March 31, and it has not shown a marked acceleration since it began to grow again at the end of 2010.

In this flow-of-funds release, the Federal Reserve revised its treatment of the banking sector. Since banks and saving institutions now both file the same reporting forms to their regulators, the Fed combined their accounts into "U.S.-Chartered Depository Institutions". Similarly, parent holding companies are now known simply as "holding companies", rather than "bank holding companies" and "savings institution holding companies". Among lending categories, "bank loans n.e.c." is now called "depository institution loans n.e.c.", and it now includes savings institution and credit union loans to business. Interbank transactions have also been reorganized. For the Fed's description of these and other revisions, see their announcement here.

These changes drew our attention to the pattern of sectors providing credit. The new combined depository sector provided $239 billion in funding during Q1, which is actually a slowdown from their provisions in the prior two quarters, and was mixed by type. General lending, mostly to business, amounted to $284 billion, the largest amount since early 2008. Net liquidation of mortgages resumed after a modest increase in Q4, although the acquisition of agency mortgage securities, both regular mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), firmed to $277 billion, their largest quarterly amount since mid-2004. The depositories were still liquidating private-label MBS and CMOs. So the provision of housing credit remains a mixed bag, with these lenders clearly risk averse in taking it on.

One other interesting feature among the mix of lenders in Q1 was a huge increase in corporate bond buying by mutual funds. In the table below, credit from "other" financial sector lenders is seen at $1.53 trillion, that line-item's largest contribution since Q1 2008, early in the financial crisis. This latest period saw $900 billion from regular, open-end mutual funds; they also bought agency securities, agency MBS and corporate bonds, this last in substantial size. Source data from the Investment Company Institute suggest that bond funds and hybrid funds increased their assets markedly during the quarter.

The flow of funds data are contained in Haver's FFUNDS database. Archived series from prior to the revisions are available through Haver's HaverSelect service. The Investment Company Institute information is in the ICI database. All the dollar amounts mentioned here are seasonally adjusted annual rates.