Raw Finance

October 2009 Bank Lending Survey Shows Credit Standards Tightening, But At Slower Pace

rawfinance — Wed, 11 Nov 2009 13:11:43 +0000

Although banks are still tightening lending standards (meaning it is more difficult for borrowers to qualify for a loan), fewer are doing so, according to the October 2009 Bank Lending Survey conducted by the Federal Reserve Board. In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year. The exceptions were prime residential mortgages and revolving home equity lines of credit, for which there were only small changes in the net fractions of banks that had tightened standards. A small net fraction of branches and agencies of foreign banks eased standards on commercial and industrial (C&I) loans, whereas a significant net fraction continued to tighten standards on commercial real estate (CRE) loans.

Looking at demand for loans, it seems that homeowners and homebuyers are still looking for credit, while business loan demand continues to slacken. Demand for most major categories of loans at domestic banks reportedly continued to weaken, on balance, over the past three months. This weakening was: somewhat less widespread than in the July survey for C&I loans, CRE loans, and nontraditional mortgages; approximately the same for consumer loans; and significantly more widespread for home equity lines of credit. However, banks reported stronger demand, on net, for prime residential real estate loans. Demand for C&I and CRE loans at foreign banks continued to weaken, on balance, but the weakening was somewhat less widespread than that in the July survey.

This news is consistent with at least a couple of emerging economic themes: (1) the economic recovery will be sluggish and job creation will be slow – if businesses are not looking to borrow to grow, they’re not likely looking to hire more workers either; and (2) federal government tax credits are spurring home sales – stronger demand for prime residential real estate loans would suggest this is the case, and now that the Homebuyer Tax Credit has been extended to May 1, 2010 (to sign a contract) and July 1, 2010 (to close on the purchase) and expanded to certain current homeowners, demand for residential real estate loans should remain strong through next spring.

The survey also asked respondents three special questions with regard to: (1) the decline in C&I lending over the first eight months of 2009; (2) the status of CRE loans that were due to mature in September 2009; and (3) the changes in credit card lending practices due to the enactment of the Credit Card Accountability and Responsibility and Disclosure (Credit CARD) Act of 2009.

In response to a special question on the sources of the decline in C&I lending this year, the two sources domestic banks cited most often as being “very” important were decreased originations of term loans and decreased draws on revolving credit lines. In response to a second special question, banks indicated that, of the CRE loans on their books that were scheduled to mature by September of this year, more loans had been extended than refinanced. In response to special questions concerning the Credit CARD legislation passed in May 2009, a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments.

Please click on the following link to view a summary of the report, with links to tables and the full report: The October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices

G-20: Economic Recovery Depends on Continued Policy Support

rawfinance — Tue, 10 Nov 2009 13:14:10 +0000

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors held a meeting in St. Andrews, Scotland, and on Nov. 7, 2009, announced their intention “to maintain support for the [economic] recovery until it is assured.” Noting the uneven nature of the worldwide economic recovery to date and the high rate of unemployment, the G-20 effectively silenced recent rumor and speculation that fiscal stimulus and other economic support programs would be drastically curtailed if not ended in the near future. Although this will likely put more pressure on the U.S. dollar, stock markets are also likely to continue rallying with the knowledge that government support will continue.

The G-20 also announced the following additional goals and objectives for the coming year:

• to set out our national and regional policy frameworks, programmes and projections by the end of January 2010;
• to conduct the initial phase of our cooperative mutual assessment process, supported by IMF and World Bank analyses, of the collective consistency of our national and regional policies with our shared objectives, taking into account our institutional arrangements, in April 2010;
• to develop a basket of policy options to deliver those objectives, for Leaders to consider at their next Summit in June 2010; and,
• to refine our mutual assessment and develop more specific policy recommendations for Leaders at their Summit in November 2010.

To view the full announcement from the G-20, please click on the following link: 7 November 2009 Communiqué

Hedge Funds, Private Equity Growing in Asia

rawfinance — Tue, 10 Nov 2009 13:12:31 +0000

Investment advisers said investors in Asia and beyond are becoming increasingly prepared to allocate capital directly to hedge funds and private equity. “It’s still early stages in Asia, but we are now in the growth phase as far as the hedge fund industry is concerned,” said Ananth Shenoy, Citi Private Bank’s head of managed investments for Asia. “So from that perspective, there’s more reason for us to look at locally sourced and developed solution sets.”

View the full story at AsianInvestor.com by clicking on the following link: Investors eye Asian hedge funds and private equity.

Why Tax Cuts Are Preferable to Fiscal Stimulus Programs

rawfinance — Mon, 09 Nov 2009 13:10:41 +0000

In combating the global financial crisis, governments have turned to easy monetary policy and large fiscal stimulus programs. For countries that have run enormous current account surpluses, like China, fiscal stimulus comes easy because they have the money to spend. However, countries that have run enormous current account deficits, like the United States, will find that, even if their fiscal stimulus works, they will have the separate and unpleasant problem of seeking a way to pay for it later. In light of this, it is worth considering whether fiscal stimulus programs are the best way to jumpstart a faltering economy. Harvard Professor of Economics Robert Barro’s research suggests that the expected multiplier effect of fiscal stimulus, that is how many more dollars are created for each dollar of fiscal stimulus spent, may be much lower than government estimates, and therefore, tax cuts would have the greater effect.

Barro and Charles Redlick, in their most recent publication, conclude:

Our bottom line from this research is that a healthy scepticism is warranted when policymakers claim government-spending multipliers in excess of one. Our estimates suggest that the multiplier effect of defence spending falls more in the range of 0.6 to 0.8, and we find it unlikely that non-defence multipliers would be larger. Therefore, our conclusion is that total economic output increases less than one-for-one with increased government purchases. However, we do find evidence to support the view that tax cuts stimulate total output, with a one percentage point decrease in the average marginal tax rate leading to an increase of about 0.6% in the growth rate of real per capita GDP. As such, our preference in the design of fiscal stimulus packages would be for more tax cuts and less reliance on increased government spending.

To view the full column by Barro and Redlick at VOXeu.org, please click the following link: Design and effectiveness of fiscal stimulus programmes

September Consumer Credit Report: Deleveraging in Full Swing

rawfinance — Fri, 06 Nov 2009 20:15:52 +0000

The September 2009 Consumer Credit Report shows that consumers continue to shed debt at an increasing pace. Consumer credit decreased at an annual rate of 6 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3.75 percent. In September, consumer credit decreased at an annual rate of 7.25 percent.

To view the full statistical report, please click on the “Consumer Credit Statistics” page on the menu bar above.

Unemployment Rate Rises to 10.2 Percent; October 2009 Non-Farm Payrolls Decline 190,000

rawfinance — Fri, 06 Nov 2009 13:35:05 +0000

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

To view the full report, please click on the “Employment Statistics” page on the menu bar above.

U.S. Productivity Jumps 9.5 Percent in 3Q 2009

rawfinance — Fri, 06 Nov 2009 13:28:33 +0000

Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics (BLS) reported on Nov. 5, 2009. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7 percent. Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours of all persons, including employees, proprietors, and unpaid family workers. Output increased 4.0 percent and hours worked decreased 5.0 percent in the third quarter of 2009 (all quarterly percent changes in this release are seasonally adjusted annual rates).

From the third quarter of 2008 to the third quarter of 2009, nonfarm business output fell 3.5 percent and hours worked fell faster, 7.5 percent, resulting in a productivity increase of 4.3 percent (chart 1, tables A and 2). The four-quarter decline in hours was the largest in the series, which begins in 1948. Nonfarm business productivity rose 1.8 percent in 2008, and 2.6 percent per year on average during the 2001-2007 period corresponding to the last complete business cycle.

For historic productivity figures, please click on the “Economic Growth Statistics” page on the menu bar above and scroll down toward the bottom of the page.

For the full BLS release, please click on the following link: Productivity and Costs.

RGE Monitor Analyzes the “Too-Big-To-Fail” Problem in the Financial Industry

rawfinance — Fri, 06 Nov 2009 13:22:35 +0000

Below is a reproduction of a release from Nouriel Roubini’s economic think-tank, RGE Monitor. In the release, RGE Monitor analyzes government efforts toward financial regulatory reform and, specifically, the issue of monitoring systemic risk and what to do with complex financial firms in the complex global financial industry.

Personally, I think too much is being made about the size of firms. Proper monetary policy and a balance between countries that have a current account deficit (the U.S.) and countries that have a surplus (China) would adjust money flows in such a way as to alter the behavior of financial firms and avoid dangerous bubbles in complicated financial instruments like credit default swaps and mortgage-backed securities. But that is just my humble opinion.

Here is RGE Monitor’s analysis:

Too-Big-To-Fail: Regulatory Reforms of Systemically Important Institutions

Although the G20 finance ministers pledged stronger prudential regulation and financial oversight of systemically important firms at their September meeting, there is no consensus yet among regulators, lawmakers and academics on how best to proceed. Nouriel Roubini noted recently that the problem of banks being too big to fail is even bigger now than it was before the crisis: “Why don’t we go to a system where they’re not too big to fail to begin with? The true solution to the too-big-to-fail problem requires more radical choices. In addition to an insolvency regime, such institutions should be broken up and unsecured creditors of insolvent institutions should have their claim automatically converted into equity. A separation of commercial banking and risky investment banking should also be considered. Thus, some variant of the Glass-Steagall Act should be reintroduced.”

If the government creates a new firewall between deposit-taking institutions and investment banks, as was the case before the repeal of the 1935 Glass-Steagall Act in 1999, only the former group would receive access to lender of last resort facilities and deposit insurance. The latter should be subject to receivership should they get in trouble. Advocates of this solution include Paul Volcker (who chaired the Group of 30 report), Mervyn King (Governor of the Bank of England), and even Alan Greenspan favors a breakup, according to recent statements (although he supported the repeal of Glass-Steagall). Among policymakers, King has made a particularly forceful case, noting that “it is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place.”

Others argue that in the era of financial innovation, size by itself is not the main issue, but rather the degree of complexity and interconnectedness (this was the rationale given for bailing out smaller institutions like Northern Rock in the UK and Bear Stearns in the U.S.). The solution, according to this view, entails stricter capital, liquidity, compensation and counterparty risk management requirements for designated institutions to set the proper incentives against excessive risk taking, including explicit insurance premiums against systemic risk. The Obama administration’s proposal and the updated Turner Review in the UK are in this camp, as are many academic advisory groups (see e.g. NYU Stern report, CEPR/Geneva Report, as well as the de Larosiere report in the EU). Charles Goodhart, co-author of the CEPR/Geneva report, recently made the case against ‘narrow banking,’ citing the pro-cyclical boundary problem of deposit flows in and out of narrow banks as one issue, and the maintenance of credit flows as a second. Similarly, some point to the need to “reevaluate the priority treatment of qualifying repo and swap contracts to determine if it unnecessarily adds to systemic risk” (Squam Lake Working Group on Financial Regulation).

Meanwhile, as regulators and lawmakers on both sides of the Atlantic deliberate, the European Commission’s Competition Commissioner Neelie Kroes has taken action in a move that effectively settles the debate from a practical perspecitve. On October 27, 2009, she ordered the split of ING, the Dutch bancassurance conglomerate that received bailout funds and was consequently determined to have been given an unfair advantage under State Aid rules. As expected, a few days later government aid recipients RBS and Lloyds of the UK reached an agreement with the government and the EU competition authorities calling for significant divestments of the banks’ businesses over four years, as well as revised Asset Protection Scheme (APS) participation terms for RBS. (Lloyds will not participate in the APS but pay a compensation fee to the Treasury for the implicit protection received so far.) Meanwhile, the UK Treasury will inject £25.5 billion of capital into RBS, for a total of £45.5 billion pounds—the costliest bailout of any bank worldwide, according to press reports.

In the U.S., on the other hand, the House Financial Services Committee presented a draft law on October 27, 2009 based on the administration’s June 17, 2009 proposal for comprehensive regulatory reform. The draft law conveys broad supervisory powers of designated systemically important institutions to the Federal Reserve Board. In addition to higher risk-based capital requirements, the new prudential standards for systemic institutions include leverage limits, liquidity rules, concentration limits and the drafting of a “living will” (i.e. a resolution plan). The Fed also receives authority to ask any systemically important firm to sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities or to impose conditions on business activities. Rep. Barney Frank also agreed to a Financial Company Resolution Fund (FCRF) to be pre-funded through risk-based assessments of all financial institutions with US$10+ in assets. However, in a sign that a final agreement is still far agreed upon, the Senate Committee is preparing an alternative bill that would consolidate the current four bank regulators into a single supervisory body in a move that would significantly curtail the Fed’s authority. Similarly, according to this alternative proposal, the Fed would be one among equals in the Council of Regulators whose task is to monitor systemic risk.

Once the roles are assigned, the regulator has to decide on the exact quantity and composition of the new capital requirements. Since the adoption of a certain ratio is somewhat artificial and not very indicative as an early warning system—as the recent crisis has shown—economists are advocating market indicator-based contingent debt to equity swaps as an efficient restructuring tool for large institutions that wouldn’t put taxpayer money at risk or trigger derivatives contracts. Nonetheless, Mervyn King cautions that while the inclusion of convertible debt in capital requirements is worth a try, this tool does nothing to address the moral hazard of designated TBTF institutions. On the contrary, “they still have an incentive to take really big risks because the government would provide some back-stop catastrophe insurance.”

Ultimately, if the realized asset value shrinks below liabilities, an orderly resolution would be warranted. The House draft bill appoints the FDIC to the task. In the UK, the FDIC served as a role model to the UK’s new Special Resolution Regime, instituted in the aftermath of Northern Rock. Many other European countries lack an equivalent mechanism, making the timely resolution of cross-border institutions a very difficult task, especially with respect to fiscal burden-sharing (as the example of Fortis showed). Martin Čihák and Erlend Nier of the IMF review the legal framework in the EU and note that while the 2001 Directive on Reorganization and Winding-Up of Credit Institutions explicitly grants the home country that issued the banking license the sole power to initiate reorganization measures with full effect throughout the EU, these principles do not apply to (wholly-owned) subsidiaries that have their own licenses but whose operating systems are nonetheless fully integrated. Indeed, most cross-border expansion in the EU happened through subsidiaries. What is needed, then, is the institution of a special resolution regime at the holding level for cross-border banks on a fully consolidated basis, or at least some harmonization of rules at the state level.

Homebuyer Tax Credit Extension Enacted

rawfinance — Thu, 05 Nov 2009 13:47:55 +0000

Legislation passed by the Senate on Nov. 5, 2009, in a 98-0 vote, approved by the House in a 403-12 vote on November 6, and signed into law by President Obama on Nov. 6, 2009, extends the First-Time Homebuyer Tax Credit to extend through May 1, 2010, a $8,000 first-time homebuyer tax credit and create a new $6,500 credit for homebuyers who have been in their current residence for the last five years or more.

Since most residential real estate transactions typically take about two months to go from contract to closing and the tax credit applies to home sales closed by May 1, 2010, (see additional exception below), individuals who would like to take advantage of the expanded credit would generally need to have a purchase under contract by the end of February. However, a Senate amendment allows a taxpayer who enters into a binding contract to purchase a primary residence by May 1, 2010, to close on the property by July 1, 2010. For the housing industry, this could point to an unusually busy winter and early-spring season, and more skewed home purchase figures during m0nths that are typically slow.

One key question is whether this extension will pull sales that would have occurred in spring and summer next year back into the winter and early spring, possibly setting up a disappointing summer selling season. On the other hand, the expansion of the credit might spur sales that otherwise would not have happened as many homeowners feel trapped in their current homes. We will be keeping a close eye on the home sale numbers early next year.

Residential real estate often spurs the economy out of a recession. One reason why this recovery is expected to be painfully slow is that residential real estate is expected to continue price declines for another year or two, possibly longer, due to a backlog of foreclosures. Perhaps the tax credit extension, along with a more general recovery in economic activity, will light a fire and rekindle the housing market. That is probably wishful thinking, but the negative case for housing is well-documented, and so, we need to be on the lookout for positive developments that could change expectations.

Unemployment

The bill also provides 14 weeks of unemployment insurance to Americans in every state, with an extra 6 weeks of jobless benefits for those workers in states with average, three-month unemployment rates above 8.5 percent.

That differs a bit from the proposal House lawmakers approved in September, which only offered additional weeks of unemployment benefits to states that broke the 8.5 percent jobless threshold.

Corporate Taxes

The legislation would also give tax breaks to big companies hit by the recession, while raising other corporate levies, particularly for multinationals.

The proposed tax increases are aimed at offsetting the cost to the government of the tax breaks, making the exact impact on individual businesses and industries difficult to judge. But business leaders worry that the measure could be a sign of more taxes to come, as lawmakers seek ways to pay for new measures without adding to the gaping federal deficit.

Tax considerations are likely to become a bigger concern for investment strategies. Obviously, personal income tax rates impact decisions about short-term gains and losses, but do not forget that the capital gains tax (the tax on investments held for at least one year) is at a historic low of just 15 percent. Investors need to be wary of any move by the government to alter this rate, as it would not only have personal implications, but may severely wound markets in the tax year prior to the change. To date, there has been no government discussion of changing the capital gains tax rate.

Please click on the following link to view the legislation as passed by the Senate: Worker, Homeownership, and Business Assistance Act of 2009.

August 2009 Bank Lending Survey Show Continued Lending Decline

rawfinance — Wed, 04 Nov 2009 19:53:59 +0000

The U.S. Treasury Department’s monthly bank lending survey for August 2009 was released on October 15, 2009, and it showed another decline in loan portfolios. The overall outstanding loan balance (of all respondents) fell 1 percent from July to August at the top 22 participants in the Capital Purchase Program (CPP), due mainly to decreased demand from borrowers, payment of outstanding debt, charge-offs by banks, and some seasonal patterns. Total origination of new loans at the 22 surveyed institutions decreased 17 percent from July to August. In August, the 22 surveyed institutions originated approximately $235 billion in new loans. Total originations of loans by all respondents rose in 1 category (other consumer lending products) and fell in 7 loan categories (mortgages, home equity lines of credit (HELOCs), credit cards, commercial and industrial (C&I) renewals and new commitments, and commercial real estate (CRE) renewals and new commitments).

New home purchases and refinancing originations fell in August. Respondents reported that both the number of fundings and the number of mortgage refinancing applications declined in August as interest rates were higher than in previous months, providing less incentive for homeowners to refinance. HELOCs saw a decrease in total originations, and institutions indicated that demand is below 2008 levels. Outstanding credit card balances held by the surveyed institutions were flat in August, indicating that consumers are spending conservatively and paying down existing debt. Other consumer lending was the only consumer category in which originations increased in August, as the onset of the academic year spurred student loan disbursements and the “Cash for Clunkers” program increased demand for auto loans. Banks again reported that demand in both the commercial real estate (CRE) market and the C&I market is well below normal levels.

Please click the following link to view the full Treasury report: Monthly Lending and Intermediation Snapshot.