Corporations are taking down all of their credit revolvers. Money is being extended to consumers through credit cards, and consumer loans. Loan syndication is going to be on hold given many traditional buyers are pulling out, so loans are going to stay on the balance sheet of the originating bank. Banks are also holding off new commercial loans until some of the uncertainty is resolved and tightening credit through higher spreads. The Fed may have lowered rates, but that is not the same as increased lending. In some cases, deposit withdrawals are reducing the funds available for expanding the loan portfolio. This restructuring of bank portfolios along with regulations to maintain liquidity are constraining bank choices. This part of the financial system should be more closely followed
At the same time, there is greater demand from large money center banks for market-making, arbitrage activities, and the warehousing of risk. Yet, these banking activities are often considered luxuries relative to core lending. While profitable, these activities are often higher volume lower margin businesses. Additionally, given the Volcker rule and use of VaR type risk management, less capital can be committed to these business activities.
There is an internal bank battle for where capital should flow, the real or financial economy. This is also a political battle because there is a view that banks should prioritize the real economy over the financial sector. Yet, a poorly functioning financial market system will spill over to the real economy. The ability to buy and sell at fair prices in capital markets is critical for money to continue to fuel the real economy. The US financial system is more capital market than bank lending focused. The disruption of capital markets will force financial intermediation activities on banks that they are not prepared for.
Investors should appreciate that the Fed is serving as a market maker, arbitrageur (at least buying cheap), and warehouser of risk through the current alphabet lending and buying programs. Buying Treasuries should reduce the off the run illiquidity and reduce Treasury basis dislocations. Repo funding provides lending not available from reserve constrained banks Buying commercial paper, mortgages, and corporates will warehouse risk until we return to normal. The Fed is doing more than just supplying money. It the reliever of financial stress.
There is an internal bank battle for where capital should flow, the real or financial economy. This is also a political battle because there is a view that banks should prioritize the real economy over the financial sector. Yet, a poorly functioning financial market system will spill over to the real economy. The ability to buy and sell at fair prices in capital markets is critical for money to continue to fuel the real economy. The US financial system is more capital market than bank lending focused. The disruption of capital markets will force financial intermediation activities on banks that they are not prepared for.
Investors should appreciate that the Fed is serving as a market maker, arbitrageur (at least buying cheap), and warehouser of risk through the current alphabet lending and buying programs. Buying Treasuries should reduce the off the run illiquidity and reduce Treasury basis dislocations. Repo funding provides lending not available from reserve constrained banks Buying commercial paper, mortgages, and corporates will warehouse risk until we return to normal. The Fed is doing more than just supplying money. It the reliever of financial stress.
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