Global Macro Speculations pointed out these remarks to Congress by Til Schuermann of the New York FED last Thursday. The main take away appears to be that “shadow banking” credit provision in the US is so significant that even if the banks were providing all the credit they were providing two years ago, it can not offset the contraction in shadow supply:
When one adds credit provision though corporate bonds and commercial paper, one realizes that commercial banks have provided only about 20% of total U.S. lending, since the early 90s. The four decades prior had banks’ share closer to 40%. The rise of market-based instead of bank-based credit provision in the last twenty years has been substantial and important.
The result of the recently completed bank stress test has greatly reduced the uncertainty about just how much capital is needed for the largest banks to weather this storm, and to continue to play their credit (re-)intermediation role while capital markets slowly open up again.
We all know the shadow banking credit supply faucet is shut off. The FED seems to think the TALF will open it up by making asset prices “transparent”:
Banks cannot pick up all of the slack. Re-invigorating the capital markets to intermediate between the supply and demand for credit is clearly very important. The Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) is designed to help with this process by providing financing for the securitization of consumer assets (for example, auto loans, credit cards, student loans and Small Business Administration loans) as well as some CMBS. As a result, spreads in consumer asset securitizations have started to narrow. To be sure, this, like other government programs, is not meant to replace the private markets. Rather, TALF and similar programs are designed to help restart markets by providing some price transparency.
The TALF is a joke and everyone knows it. Why aren’t shadow bank providers lending? BECAUSE IT’S NOT ATTRACTIVE AT CURRENT RATES OF RETURN (HIGH PRICES). They know what the prices/values are… it’s not a need for “transparency”! Those asset prices are too high (returns are too low) to “get credit flowing again”. Even the FED says there’s no loan demand. No loan demand means no willingness to pay the rate required by shadow banks. The rates have to be higher because the potential losses are real, but no one can pay what the shadow banks have to have:
The same cannot be said for loan demand. The SLOOS reports that the net fraction of loan officers reporting weaker demand in April 2009 was 60% for C&I and 66% for CRE loans, a historical low for CRE demand. Weak demand bears emphasis, as it indicates that the observed slowdown in overall credit is partly due to firms’ reluctance to borrow, and not entirely to banks reluctance to lend.
In sum, while green shoots may be sprouting in bank lending for commercial purposes—real estate or otherwise—it’s premature to start planning for a harvest. The combination of acute stresses in the financial markets, together with stresses on bank balance sheets, in the middle of the worst recession in a generation, should caution us from believing that recovery is just around the corner.
Demand for goods (and credit) is still falling. The fall is driven by rising joblessness, existing debt obligations that are too high to service and prices that are too high to pay.
