The Slowdown in Bank Lending
This article originally appeared in the Milken Institute Review.
The sharp slowdown in commercial and industrial lending (C&I, for short) over the past six to nine months — in contrast to an otherwise reasonably comfortable picture of modest growth in the American economy — is worrisome to say the least. Indeed, there is valid concern that the slowdown will threaten the ability of small- to medium-sized businesses to expand their operations and create the jobs needed to absorb an expanding labor force.
C&I lending is an important source of funding for business investment, and therefore a critical factor shaping the outlook for growth. The pause in lending is especially important for smaller enterprises that lack the ability to fund investment by issuing bonds or stock.
Some perspective is needed here. Total business investment was sputtering well before C&I lending took a dive, sinking well below its post-recovery (2010-12) pace in 2015, despite historically low interest rates. The tepid pace of investment can’t be attributed to the cost or availability of bank loans. Rather, investment slowed because businesses were (and remain) reluctant to add capacity because they face lagging product demand.