I thank you very much. Good morning to everybody.
I submitted beforehand a set of charts and tables on credit. I think I see it in front of everybody. I won't go through those one by one but just make some overview remarks about them. One of the reasons I did them was to try to put the discussion of credit in a broader context. Quite often the discussion is solely on what banks are doing, but of course, traditionally there's a variety of other sources of credit available.
The first thing that's obvious from those charts is that bank credit is growing quite strongly. In fact, unlike in previous recessions when the economy has weakened, credit from the banks has not slowed down, and for both households and businesses it is growing at a double-digit range. This will likely soften, and since I sent those charts out to you, we've had one more month of data that show the double-digit pace of growth of bank lending to business has dropped into the very high single digits--slightly below 10%. In previous cycles this has always been the pattern, that as economies weaken, particularly when nominal GDP is weakened, you've seen the demand for lending from the banks soften up.
On the household side, the lending continues to go from the banks at a double-digit range. The lines of credit are growing particularly strongly, at more than a 20% annual pace, but we've seen traditional household loans, credit cards, and mortgages also growing very strongly.
Just putting it in a broader context, the main source of funds for companies is typically retained earnings. Retained earnings have held up quite well in Canada until recently. In fact, if you look at 2002 through 2006, you'll see that retained earnings in Canada were extraordinarily strong and there wasn't actually a large demand for bank lending during that period because companies were funding it internally. Of course, it softened towards the end of 2008, and we expect that to get hit quite hard in 2009, not only by the real economy being weak but also by the drop in commodity and other prices.
In terms of the total market financing, there has been an increase in the reliance upon external funding, and I'll go through some of those sources. Share and bond issuances were reasonably strong in Canada, although they did decline from 2007. As I mentioned before, we had the largest increase ever in Canada's history in bank lending in 2008. That certainly did fill some of the gap left by some of the other sources of funding, but it was not the complete source.
I've also included for you some pieces of data on credit from the United States. The thing that's remarkable in the United States is that despite what we typically read in the newspapers, the bank lending in the United States is continuing to grow as all the other sources of credit have virtually disappeared. So once again, in 2008 there were actually negative issuances of shares. In other words, companies bought back more shares than they issued. There were virtually no issuances of corporate bonds. There was very little trade credit, and there was a virtual disappearance of the other sources, the shadow banking system--if you will, the non-banks, the hedge funds, the subsidiaries of companies that were in the financial arm. In the United States, we really did see that the banks were the only game in town, and while they did increase their lending, clearly that didn't fill the gap left by other sources and we did have a problem of credit.
I gave you a couple of charts as well on the cost of credit. This has been a major issue over the last couple of years. I've split that into two: the short-term cost and the medium-term cost.
Regarding the short term, there is good news. We have had a restoration of something approximating normalcy in the short-term end of corporate markets. Commercial paper rate is operating again. The cost of borrowing in the very short term, up to about 90 days, has come down quite a lot. It blew up in the wake of the Lehman Brothers failure, and it's been coming down steadily, quite a bit in the last two months in particular. The spreads are still not as low as they were prior to the summer of 2007, but that part of the market, the very short term, is working reasonably well. The last auction from the Bank of Canada providing 28-day funding was not fully subscribed from the banks. I think one of the reasons was that they were able to go to the market and get funding for that duration themselves.
The remaining problem continues to be at the medium and longer terms. The spreads on medium-term bonds in the corporate market are extraordinarily high. We really have to condition ourselves to not think about monetary policy in the traditional fashion. We tend to look at the central bank rate and think that's what's happening to all interest rates, and that is not the case. We have quite low mortgage rates, very low Government of Canada bond rates, very low U.S. government treasury rates, but the corporate bond spreads are extraordinarily high. Back prior to the summer of 2007, on average a Canadian bank could have raised five-year funding at 50 basis points above the Government of Canada rate. Our own bank was substantially below that. Until about a month ago, a Canadian bank would have faced a 300 basis point spread to raise five-year funding. So they went from less than 50 basis points to about 300 basis points. That's crept in a bit recently, but not very much.
So we still have a credit market that's gummed up on that medium to longer term on the corporate side. Hopefully the announcements of Geithner in the United States and hopefully what we might see in Canada in terms of quantitative easiness that gets into corporate bond markets will bring down that spread, but I think it's the last remaining piece of this puzzle. We need to see some improvement on that before we can have some confidence of a return to normalcy in credit and some economic growth.
Thank you.