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Bank lending mounts a comeback

Rick Newman

One part of the economy is back to normal — the old normal, that is.

Bank lending in the second quarter jumped by the largest amount since the end of 2007--when the last recession technically began--and is now at the highest level ever. If you erased the last seven years from the record books, the trajectory of lending would actually look healthy and normal.

Of course, those intervening seven years were a time of massive disruption, including a financial crisis, deep recession and very weak recovery. As layoffs mounted and borrowers defaulted, banks cut back sharply on lending, which in turn crimped the recovery. Now, the numbers show banks have shaken off much of the lending hangover, as Yahoo Finance Editor-in-Chief Aaron Task and I discuss in the above video.

Here’s a breakdown of bank lending for the second quarter of 2014, according to the latest figures from the FDIC.

Loans to individuals, excluding mortgages: Total amount outstanding: $1.37 trillion, highest ever.

Credit card lending: $678 billion, highest since 2013.

Auto loans: $371 billion, highest on record (data breaking out auto loans only go back to 2010).

Commercial and industrial loans: $1.66 trillion, highest ever.

Residential mortgages: $1.84 trillion, still down 18% from 2007 peak.

Total amount of loans and leases: $8.1 trillion, highest ever.

Credit-card and auto lending have aided the recovery, with car sales strong, as one example. Auto lenders have granted loans to more subprime borrowers, extended loan durations and come up with other ways to get money into people’s hands so they can buy vehicles. The result has been a strong pace of sales comparable with prerecession levels. More credit-card spending, meanwhile, has helped prop up consumption, even though incomes and wealth levels are still below earlier peaks.

Some critics worry about a lending bubble, but there’s virtually no sign of trouble (yet). Credit-data firm Experian recently noted a tiny uptick in the delinquency rate on auto loans, but delinquencies remain low by historical standards and there's no reason to think a one-time increase will generate a default crisis. The Federal Reserve’s latest report on credit and debt, meanwhile, shows default and delinquency rates have been falling steadily since the recession ended. Unless there’s a sudden change, these types of consumer lending are reverting to historical norms, otherwise known as the old normal.

The new normal applies to two other categories of lending: One is student-loan debt, which has exploded during the past several years and now totals more than $1 trillion. The default rate on those loans has been rising, revealing the financial stress many young adults struggle with. The default rate ought to come down as the labor market improves and jobs for recent grads become more plentiful, but many of those borrowers will remain scarred all the same.

The other outlier is housing debt. Mortgage lending remains depressed, one of the factors holding back a strong housing recovery. Lending standards for mortgages remain painfully high, with many potential home buyers still unable to get approved. And fewer people seem interested in buying a home in the first place, after seeing the investment backfire for so many homeowners during the housing bust. In these two markets, the new normal might be lasting, and the old normal, eventually, forgotten.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.