The shadow banking world's implosion is the real culprit
By Gillian Tett, The Financial Times
These days, banker-bashing
is a popular sport for politicians of all stripes. For not only are the
banks being blamed for unleashing financial disaster - while paying the
bankers fat bonuses - they are also being blamed for slashing loans in
a way that is now triggering a recession.
But is that perception
really right? If you take a look at some recent research produced by
Citigroup, it might seem not. For if Citi data are correct, the real
source of the current credit crunch is not a collapse in bank loans,
but the implosion of the shadow banking world.
And that in turn
provokes a wider question: namely whether there is anything that
policymakers could, or should, be doing now to revive the activities
that were once performed by those peculiar shadow banks.
The
numbers highlight the scale of the challenge. According to Citi (which
has crunched its own figures and those of Dealogic), almost $1,500bn
worth of new corporate loans were issued across the global financial
system in 2008. That was well down from 2007, when over $2,000bn of
loans were made.
But the loan total last year was similar to
what was seen in 2006, and twice the scale of activity in 2004.
Moreover, when non-financial loans are measured, an even more notable
pattern crops up: at the end of last year, the volume of non-financial
corporate loans was still growing at an annual rate of 10 per cent in
both the US and Europe. That was well below the 20 per cent expansion
seen in Europe before the peak of the boom, and in some sectors new
bank-lending has tumbled. But those figures do not point to a credit
drought. After all, from 2002-2004, loans to non-financial companies in
the US shrank at an annual rate of more than 5 per cent.
What is
imploding though is the securitisation world. If you exclude
agencybacked bonds, in 2006 banks issued about $1,800bn of securities
backed by mortgages, credit cards and other debts. Last year, though, a
mere $200bn of bonds were sold in markets, and this year market
issuance is minimal.
Indeed, the only group really acquiring
repackaged debt now are western central banks, which have taken huge
volumes of securities on to their own books (and away from the market),
as part of their liquidity-injection measures.
So far this
pattern has prompted relatively little wider political debate. After
all, before the summer of 2007, most non-bankers had no idea that a
shadow banking world even existed.
But the longer that this
drought continues, the bigger the policy issues become. After all, no
politician wants to see the government buying mortgage-backed bonds
forever; but nobody really believes that traditional, old-fashioned
lending can take up all the slack. So either the system needs to find a
way to restart securitisation or we face a world where credit will
remain a highly rationed commodity for a long time to come.
Is
there any answer? This week the UK government made one attempt to break
the impasse by unveiling a scheme to provide state guarantees for some
mortgagebacked bonds (the idea, as my colleague Paul J Davies explains
on the next page, is to prod the banks into repackaging such debt
again). In America, officials are playing around with similar ideas.
One concept being mooted, for example, is that the FDIC should help
troubled banks securitise a swathe of assets.
On both sides of
the Atlantic, industry leaders are also drawing up plans to make the
securitisation process much more transparent, and thus, hopefully, more
credible to future investors. Another idea is to impose a so-called "5
per cent rule". This would force banks that issue securities to retain
at least 5 per cent of them on their own books, to ensure they have a
vested interest in monitoring the creditworthiness of end borrowers.
On
paper many of those ideas look sensible. And if they are all
implemented, they might eventually enable the securitisation market to
return to life, albeit on a more sober scale. But "eventually" is the
key word here: right now, most parts of the securitisation market are
all but dead. The longer that politicians wail about the supposed
"failure of banks to lend", while ignoring the bigger source of the
credit crunch, the harder it will be to wean the system away from
government support.
