Thursday, November 06, 2008

Lend what?

A Bloomberg article yesterday discussed the fact that the decline in LIBOR rates is not leading to a meaningful increase in the access to credit. A market "expert" was quoted as saying "I don't think the banks are willing to extend credit soon". Another Bloomberg article highlighted on the same page discussed the news that no, that's zero, credit card securitizations were done in October as compared to $17 billion of credit card securitizations in October 2007(and that was lower than October 2006).

There is, as they say, a disconnect between these two articles. The suggestion that banks are not willing to extend credit is missing the point. With the securitization markets not functioning, the banks cannot distribute debt that they originate. Everything at the moment stays on their balance sheets. With the regulators now carefully scrutinizing capital levels and risk profiles of banks for obvious reasons and with building,not destroying, shareholder value still an obligation of publicly traded companies, the banks cannot possibly hold enough debt on their balance sheets to compensate for the inability to distribute through securitization. In fact, the decline in access to bank credit is likely to get worse before it gets better.

Banks want to lend. That's an important part of their business. The business had become underwriting for distribution, not lending for balance sheet building. Going back to that old model takes a huge amount of the capacity to lend out of the system. Until overall financial system confidence* is restored and securitization markets again become viable, banks are hamstrung and no more able to find that goose that laid the golden egg than anyone else.


*Investors rule. Until government funds, pension funds, hedge funds, foreign investors, individual investors, high net worth investors, AND banks begin to expand their risk appetite again, beyond short term paper, bank lending will not be resusitated.

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