• Commercial and industrial credit from commercial banks has increased sharply and over the past 13 weeks reached a growth rate of more than 20% annualised;

• More generally, banks continue to provide credit to households and non-financial corporations despite slowing deposit growth;

• In terms of market issuance, commercial paper outstanding remains below pre-pandemic levels, but has increased a modest amount in recent months; perhaps of greatest concern would be that high yield corporate bond issuance has slowed.

• But what is driving the access to credit by non-financial corporates?

ONE OF THE more concerning developments in recent months has been the sharp slowdown in commercial bank deposit growth in the United States—itself a key component of measures of broad money. Indeed, bank deposits are at close to contractionary territory over the past quarter, as noted previously, which itself points to concerns about spending growth in a traditional monetarist framework.

However, much of this slowdown is due to the transfer of deposits from commercial banks into money market funds (MMFs) which are themselves, in turn, increasing their claims on the Fed. Hence banks are reducing their reserves at the Fed, shedding deposits in the process, but this doesn’t necessarily imply a reduction in bank lending.

Indeed, overnight reverse repos (ON RRPs) at the Fed have continued to drift higher in recent weeks despite the initiation of quantitative tightening in June. ON RRP reached USD2.2 trillion on 6th July. Meanwhile, bank deposits with the Fed—that is, cash assets on their balance sheet—fell to only USD3.2 trillion, down more than USD600 billion over the past year.

The continued expansion of ON RRP therefore matters for two reasons. First, it suggests the scope for QT might be limited by the changing liability structure of the Federal Reserve System (unless the terms of access to ON RRP are changed). Second, it distorts the picture of bank balance sheet expansion as deposits are shifted towards MMFs. Indeed, bank deposits have hardly expanded over the past quarter (up only USD60 billion or so over the past 13 weeks).

But on the asset side of commercial bank balance sheets, bank credit creation continues to be robust. Here we take a closer look at this credit creation by banks, emphasising the changing structure of bank assets as well as other sources of credit to non-financial corporates.

Bank lending to non-financial corporates

Indeed, ignoring securities holding by banks (subject to valuation adjustments) the chart below shows credit by commercial banks in the United States to households (loans and residential real estate) as well as commercial real estate, and commercial and industrial lending.