Uh-oh: Big banks shrink lending

May 1, 2012, 2:00 PM UTC

Lending dropped at the big banks

FORTUNE — Here’s another sign that the economic recovery may be fizzling: Big bank lending, which had risen for most of last year, dropped in the first three months of 2012.

The loan drop comes as big banks face new scrutiny from regulators and bond rating firms, and when there are growing signs that the economy is weakening, again. Last week, the government said that GDP grew just 2.2% in the first quarter, which was less than analysts had predicted. On Monday, Goldman Sachs’ top U.S. economist Jan Hatzius predicted that the economy only added 125,000 jobs in April. That would be down from 240,000 jobs just two months ago.

A drop in lending is another worrying sign for the economy. When banks cut their lending, it makes it harder for small businesses to get money to expand. But a drop in lending could also signal a drop in demand for loans, meaning businesses and individual don’t want to borrow because they are worried about the economy.

JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C) cut their lending by a collective $24 billion in the first three months of the year. That was a change from last year when lending rose $34 billion at the nation’s four biggest banks in all of 2012. The biggest drops were in consumer lending, where credit card loans fell nearly 6% and home equity lines of credit dropped just over 2%. Mortgage lending was up slightly, but much of those home loans were the result of people refinancing to lower rates, and not actual new loans.

What’s more, the drop at the big banks comes at a time when lending at banks in general appears to be growing. That’s an other sign that the nation’s biggest banks still haven’t fully healed from the financial crisis. On Monday, the Federal Reserve said that banks in general had eased their lending standards in the first quarter. According to Fed data, the overall volume of bank loans in the U.S. rose by about $95 billion in the first quarter.

The biggest drop in loans came at Bank of America. Loans outstanding at B of A have dropped $78 billion in the past two years. Last year, the bank got out of the business of funding loans sold by outside mortgage brokers. The firm now only makes home loans that are sold by a bank employee. That has cut the bank’s home lending activities dramatically.

“Bank of America got hurt pretty badly by its mortgage business,” says analyst Dick Bove, who follows bank stocks for Rochdale Securities. “Banks are still in protection mode.”