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TheStreet Open House

Reading the Tea Leaves on Bank Lending: Street Whispers

NEW YORK ( TheStreet) -- Banks are growing loans, though whether they are growing them fast enough depends on your point of view and, not surprisingly, which data you choose to emphasize.

Reports this week from UBS and Keefe Bruyette & Woods both point to increasing loan growth among banks, arguing the trend bodes well for the banking sector. On the other hand, a report by Bloomberg makes the case that the growth in loans isn't keeping up with the growth in deposits. Instead, the report contends, the vast bulk of the new deposits are going into purchases of U.S. Treasury and Agency securities.

Bloomberg cites Federal Reserve data from the two month period ending July 31, noting that business lending rose 0.7% to $7.11 trillion, while deposits grew 3.3% to $8.88 trillion over the same period. That gap is a "record" and "growing at its fastest pace in two years," according to Bloomberg.

The message that story conveys is that the economy is stalling because banks are afraid of taking risk and are stashing the deposits they receive in Treasuries.

UBS, on the other hand, argues that "the conditions continue to be favorable for large-cap commercial banks to continue above average loan growth despite the higher-risk for economic slowdown." The report then points to historical data suggesting loan growth typically exceeds GDP growth during periods of economic recovery.

In a sense everyone is right. While Bloomberg's story emphasizes bank's hoarding behavior, it also cites analyst David Hendler of Creditsights, who notes that it can't go on forever as returns from Treasuries get punier all the time. It also cites an Aug. 6 Federal Reserve survey in which banks say they are easing their lending standards.

Puzzling though the data may appear, on the whole the news is positive for banks and the U.S. economy. But there's no telling how soon the rest of us will feel the impact, and its nothing a European crisis can't undo.

-- Written by Dan Freed in New York.

Follow this writer on Twitter.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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