17 January 2018

Easing Up Of Lending Terms

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Fed Vice Chair Yellen noted earlier in the week that there were few signs that low interest rates were leading to a pick-up in excessive debt. One way of monitoring debt is to look at short-term collateralized borrowings. In the run-up to the financial crisis in 2008, US primary dealers aggressively ramped up their net borrowings in this market. Activity fell sharply during and immediately after the crisis – particularly against non-government collateral. And although leverage by this measure has picked up from the post-crisis trough, it remains well below its 2008 peak. The Fed’s Senior Credit Officers’ Opinion Survey (SCOOS) measures the extension of credit in secured funding markets across a number of qualitative dimensions for certain types of non-government collateral such as corporate bonds, ABS, and equities. These qualitative dimensions record the percent of respondents reporting easier or tighter credit conditions across haircuts, maximum loan amounts and tenors. Additionally, the survey measures the level of market demand for particular types of collateral financing. On average and across all the non-rate dimensions, the diffusion indexes were all (except for equities) sharply higher in the March 2013 survey than they were in the December 2012 survey, reflecting an easing of conditions. The biggest relative easing over the first quarter appears to be against high grade corporate. The data point to a sharp easing (lengthening) in the maximum maturity of loan amounts against corporate bond collateral. Elsewhere, overall financing terms for equities were largely unchanged in March even though the maximum funding amount was tighter (lower) than it was in December. Interestingly, the demand for equity financing rose in the first quarter. This is consistent with the sharp uptrend in the outstanding amount of equity repo since mid-2012. Both the total amount of net secured lending activity as well as the reported lending conditions in the SCOOS point to an easing in some of the formerly very tight lending conditions.
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