The Silent Crisis: How Banks’ Lending Habits Are Stifling Business Growth

Is the composition on commercial bank balance sheets impeding economic growth?

Reflecting during the holiday season, I revisited the mission of Trade Ledger, which I founded eight years ago. As we enter 2025, our core challenge remains: banks worldwide struggle to provide businesses with sufficient credit for working capital and growth investment. Data consistently shows that, except for large corporations, businesses across various sectors and regions face a shortage of bank credit.

Seeking deeper insights, I found limited analysis on this issue within the banking sector, which is surprising given its socio-economic significance, not even policy-level discussions seem to exist. Turning to academic research, I discovered that much macro-level analysis focuses on how changes in bank balance sheets impact income inequality like this one particularly. A 2019 working paper by Dirk Bezemer and Anna Samarina suggests, “that an expanding financial sector inflates real estate and equity prices, benefiting asset owners and potentially increasing income inequality”.

This perspective aligns with the persistent rise in housing prices observed in many countries. “The interaction between policy and inequality has been widely debated, especially following Piketty’s work in 2014, which emphasized the role of capital in the economy. Research indicates a ‘debt shift’ in many countries, where bank credit has moved away from non-financial businesses toward real estate and financial markets. This shift may contribute to increasing income inequality, as identified by Piketty and others.”

Trade Ledger’s mission aligns with addressing this issue. We advocate for increasing ‘positive-impact’ credit for businesses as a strategy for economic growth and financial mobility, and ultimately preserving the robust diversity of financial markets.

The paper continues. “Examining the numbers reveals significant changes in bank credit composition over recent decades. Bezemer et al. (2016) found that, in a panel of 14 countries from 1990 to 2011, the substantial rise in total bank credit was mainly due to growth in credit to real estate and financial asset markets, increasing from 30% to 66% of GDP. In contrast, bank credit to non-financial businesses remained relatively stable, rising only from 41% in 1995 to 46% of GDP in 2008.”

These figures are striking. Since 1990, business credit has remained almost flat as a percentage of GDP, while mortgages have grown to two-thirds of all bank credit, doubling in just over two decades. It’s unsurprising that such a shift influences social inequality and transforms business operations and funding strategies. “Delving deeper into bank credit composition, it’s evident that the rapid growth of mortgage lending to households has driven this significant change in banks’ balance sheets. The traditional role of banks—channeling household savings into productive business investments—now constitutes only a minor part of banking activities, despite being central in the 19th and 20th centuries.

Additionally, household mortgage debt has risen faster than asset values in many countries, leading to record-high leverage ratios that potentially increase the fragility of household balance sheets and the financial system itself.”

This situation prompts critical questions for me:

• Why are we not discussing this fundamental shift in the nature of banking?

• Where is the analysis extrapolating the impact of such (relatively) rapid changes in the financial system on society?

• Is the industry’s performance focus too narrow, examining trends like mortgage market performance for example is isolation, without considering systemic implications?

• Are systemic considerations like regulation driving this change, or a flight to safety (or scalable performance)?

• Are we adopting too short-term a perspective in analyzing bank credit portfolios and setting systemic policy?

It’s time to discuss the role of, distribution of, type of, and optimal amount of business credit necessary to promote growth and address financial inequality. “Research indicates that shifts in bank balance sheets have significant consequences for financial stability. Mortgage lending booms (have) become a more important predictor of financial fragility in the postwar (WW2) era. For policymakers designing macro-prudential policies, this underscores the crucial role of mortgage credit in building financial fragility. Moreover, contemporary business cycles are predominantly influenced by trends in mortgage credit.”

An old adage applies here: the tail is wagging the dog. Housing has become a massive asset class, potentially at the expense of its primary role as shelter and the financial system’s ability to support positive economic growth through adequate business credit provision. I believe that risk-taking, business activity is such a fundamental creator of long-term economic security that it deserves its own policy considerations in regard to credit provision that is unrelated to mortgage or other credit and balance sheet considerations. Isn’t it time we addressed the systemic undersupply of credit to non-financial business sectors?

As a fintech CEO, I believe that 2025 presents a unique opportunity due to the convergence of AI and embedded finance. Commercial banks can now disrupt themselves, much like other sectors have in the post-internet era. This year could mark the emergence of a new banking powerhouse, bridging into the new economy alongside leading tech companies that are now household names.

If you’re a commercial bank CEO and this discussion resonates with you, let’s connect.

On January 15th, I’ll be in conversation with a senior industry colleague on this topic. If you would like to receive this in-depth conversation, you can subscribe here where I’ll regularly be speaking about the collision of embedded business lending with AI.