Tara Sullivan and James Vickery
experienced a rapid rise in loan delinquencies and defaults during the 2007-09
recession, driven by rising unemployment and falling real estate prices, among
other factors. More than four years on from the official end of the recession, how do things look now?
The chart below highlights the
striking deterioration in bank loan performance during the 2007-09 recession
period. (This chart, like others in this post, is drawn from the most recent
edition of the New York Fed’s report Quarterly Trends for Consolidated U.S. Banking Organizations.) At the start of 2007, only about 1 percent of bank loan balances were “nonperforming,” meaning that the loan was
at least ninety days past due or in nonaccrual status. By late 2009, however,
the fraction of nonperforming loans (NPLs) had increased to more than 5 percent.
For the largest bank holding companies (those with consolidated assets
exceeding $500 billion), the fraction of nonperforming loans increased even more
rapidly, reaching a peak of 7.3 percent in fourth-quarter 2009.
The overall performance of loans in
banking portfolios has improved substantially since 2009. The aggregate NPL
ratio has declined in each of the past fourteen consecutive quarters and now
sits at 3.1 percent, compared with its crisis peak of 5.7 percent. Despite this
improvement, however, the fraction of nonperforming loans still significantly
exceeds pre-recession levels.
Digging a little further into the
data, we see notable differences in performance trends by loan type. First,
let’s take a look at commercial and
industrial (C&I) loans, a category that includes credit lines, plant
and equipment loans, and financing for inventory and for other corporate assets
(not including real estate). Not surprisingly, C&I loan performance tends
to move closely with the business cycle, with peaks in the nonperforming loan
ratio associated with each of the last three recessions. The NPL ratio for
C&I loans has declined sharply since 2009, reflecting improved
macroeconomic conditions and the recovery in corporate profits. The ratio now sits below 1 percent,
well below its historical (1991-2013) average.
The fraction of nonperforming consumer loans has also recovered significantly
since the end of the recession. This category includes credit cards, auto loans,
and other types of personal loans not backed by real estate. Historically, consumer
loan delinquency is less correlated with the business cycle than C&I loan
performance, as can be seen from the chart below. While the share of nonperforming
consumer loans surged from 2007 to 2009, there was no corresponding spike
during the two previous recessions.
The consumer loan NPL rate has
fallen by more than half since 2009, and now actually lies below pre-recession levels. Only 1.1 percent of consumer loan
balances are currently nonperforming, a level last seen in 1995.
What about student loans? The New York Fed’s Quarterly Report on Household Debt and Credit has documented a rise in the
fraction of delinquent student loans in recent years, as well as a surge in the
amount of student debt outstanding. But although student loan balances are
reflected in the graph above, to date they have been only a modest contributor
to banking sector loan delinquencies and losses. One important reason is that most
student loans are issued or guaranteed by the federal government. Student loans
are classified in bank and bank holding company regulatory reports as part of
“other consumer loans.” This category, which also includes non-credit-card personal
loans and revolving credit plans, accounts for 2.6 percent of delinquent bank
loan balances and 9.7 percent of total loan charge-offs as of second-quarter
The performance of the residential real estate loans held in
banking portfolios showed a relatively muted recovery compared with the performance of
C&I and consumer loans. Currently, 7.7 percent of residential mortgage debt
is ninety days or more past due, only slightly below the 2009 peak. This
persistently high delinquency rate likely reflects a range of factors,
including the slow resolution and foreclosure process for delinquent loans in many states,
as well as the lingering after-effects of the mortgage credit boom and
subsequent collapse in home prices. Note that the fraction of nonperforming
mortgages is about three times higher for the largest bank holding companies (the
six firms with total assets exceeding $500 billion) than for the rest of the
commercial banking industry.
Residential mortgage performance
since 2007 represents a striking departure from historical patterns. Even
though the nonperforming loan ratio has exceeded 7 percent for the past sixteen
consecutive quarters, it didn’t even reach 2 percent at any point between 1991
and 2006. Prior to the financial crisis, residential mortgages were often thought
to have relatively little credit risk, in part because the loan is collateralized
by an asset (a house or apartment) that generally increases in value from one
year to the next while the balance on the loan declines over time owing to
amortization. Of course, contrary to this pattern, U.S. home prices fell
sharply in the late 2000s, compounded by weak loan underwriting standards
during the prior mortgage credit boom. Taking a longer historical view, we note
that residential mortgage delinquencies and defaults were also high during the Great Depression, the
last period during which the U.S. experienced a sustained national decline in
Completing our look at loan
performance since the end of the recession, the chart below plots the
performance of commercial mortgages.
These loans are secured by commercial real estate, including offices,
warehouses, factories, malls, multifamily apartment buildings, hotels, and
buildings under construction. As with residential mortgages, the fraction of nonperforming
commercial mortgages remains well above pre-recession levels, although it has declined
comparatively more quickly since 2009. The peak in the NPL ratio for commercial
mortgages is similar to the peak reached during a previous period of elevated
delinquencies in the early 1990s. Like residential mortgages, commercial
mortgages saw elevated delinquencies and defaults during the 1930s.
To sum up, the performance of loans
in U.S bank portfolios has improved significantly, albeit unevenly, since the
end of the 2007-09 recession. Differences in performance across major loan
categories reflect key features of the recession itself, in particular the central
role played by the collapse in real estate prices and fall in personal consumption. In the future, the tighter underwriting standards applied to more recent loan cohorts would
suggest that the fraction of nonperforming loans may continue to fall over time,
as earlier loan vintages become a progressively smaller share of bank
portfolios. As in recent history, however, macroeconomic and financial market
conditions are likely to be the main determinant of bank loan performance going
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
James Vickery is a senior economist in the Research and Statistics Group.