Two Contrasting Views: Are We on the Verge of a Lending Surge or a Lending Rut?

The Q4 data are now largely reported across the credit union industry.[1] And, at 4.98%, the quarter’s loan growth is one of the most notable measures – reversing a two-year trend of quarter-over-quarter declining growth rates.

Of course – like many measures – loan originations have been upended by the historic distortions of the pandemic and the post-pandemic period. And, many industry participants have struggled to understand their institution’s long-term run rates against a dizzying flurry of economic distortions, including closures, governmental stimulus, interest rate hikes and deferrals and moratoria.??

With the effects of the pandemic and post-pandemic fading and a new administration taking hold in the nation’s capital, regulatory pressures will likely ease, but the volatility does not look to be waning anytime soon. For credit union executives, this makes the work of projecting the most significant drivers of financial results – loan and share growth – as important as ever.

On the loan side, there are two camps staking very different positions for the lending prospects of credit unions and community financial institutions more broadly. Two recent articles, "Are We on the Verge of a Lending Surge" from?The Financial Brand?(December 31, 2024) and "Wall Street is Booming, but Banks Are in a Lending Rut" from?The Wall Street Journal?(January 31, 2025), present contrasting perspectives on the state of lending in the U.S. financial sector. Below is a comparison of their positions, the evidence they provide, and a look at how future data could clarify which narrative proves more accurate.

The Optimistic Outlook on Lending Growth (The Financial Brand):

1. This article argues that the U.S. is on the cusp of a lending surge driven by factors such as technological innovation, increasing demand for homeownership, and evolving consumer behaviors. It emphasizes the role of digital tools like automated underwriting systems in streamlining loan approvals and enhancing customer experiences. Additionally, it highlights strong growth in specific sectors like mortgage and small business lending.

The Cautious View on Lending Activity?(The Wall Street Journal):

1. In contrast, the?WSJ?article paints a more subdued picture, suggesting that while Wall Street is thriving (e.g., bank stock performance), traditional bank lending remains stagnant. It attributes this "lending rut" to lingering caution following the 2023 banking crisis and rising interest rates, which have dampened demand for loans.
2. The article underscores that banks are focusing more on profitability through trading and fee-based services rather than expanding their loan portfolios. It also notes that regulatory pressures and tighter credit standards may be constraining lending activity.

Evidence Supporting Each Position

• Indicators of Lending Surge: Rising homeownership rates and increased activity in small business lending suggest growing demand for credit. Innovations in digital lending platforms are reducing barriers to loan approvals and improving efficiency. Broader economic recovery trends could support increased borrowing as consumer confidence has surged since the election.
• Indicators of Lending Stagnation: The cautious approach of financial institutions following the liquidity crisis in 2023 reflects hesitancy to take on riskier loans amid economic uncertainty. Higher interest rates have made borrowing more expensive, reducing demand for credit in sectors like commercial real estate. Regulatory constraints may be limiting banks' ability to expand their loan books.

Determining Which Position Holds True Over Time

To assess which narrative proves correct, several data points will be critical:

1. Loan Growth Metrics: Future reports on loan originations across key sectors (e.g., mortgages, small business loans) will reveal whether lending activity accelerates or remains stagnant.
2. Economic Indicators: Trends in consumer spending, homeownership rates, and business investment will provide insights into underlying credit demand. At the same time, the trends in delinquencies and charge-offs will influence the appetite of financial institutions for marginal lending activities.
3. Bank Earnings Reports: Quarterly disclosures from major banks and community financial institutions will show whether loan portfolios are expanding or if profits continue to rely on non-lending activities.
4. Regulatory Developments: Changes in capital requirements or other regulations could either stimulate or further constrain lending. Here, the Trump administration’s early days, particularly the approach to the Consumer Financial Protection Bureau – have been encouraging.

It will take some time to appreciate whether the recent quarter’s uptick in lending activity is an anomaly or a harbinger of more activity to come.? And whether one adopts?The Financial Brand’s?optimism based on technological advancements and economic recovery, or?The Wall Street Journal’s idea that structural challenges could impede lending growth, the release of additional data over the coming quarters will provide clarity on whether banks and credit unions can capitalize on emerging opportunities or remain entrenched in a cautious stance.

[1] At the time of this writing, 4,496 credit unions were reporting Q4 2024 numbers.