Wednesday, December 21, 2011

Fed's Easing Spurs Treasury Purchases as Banks Shun Lending?

Despite the U.S. Federal Reserve's efforts to spur lending by keeping interest rates low and pumping up liquidity with quantitative easing, banks continue to borrow from the government at low rates and reinvest the funds into higher-yielding Treasury bonds.

U.S. commercial banks are buying the most Treasury and agency debt since the Fed began tracking the data in 1950, adding $186.2 billion to their inventories through Oct. 20 bringing the total to $1.62 trillion. At the same time, commercial and industrial loans outstanding have fallen by about $68.5 billion this year to $1.23 trillion, according to central bank data compiled by Bloomberg News.

By tying up their capital in government securities, banks make it more difficult for small businesses to get loans and create jobs, which discourages consumer spending.

The banks increased their appetite for government debt even as yields on two- and five-year Treasuries fell to record lows last week, when the Fed said it would concentrate the $600 billion of purchases in that maturity range.

Additionally, the Basel III regulations set by the Bank for International Settlements in Basel, Switzerland, could stifle global economic growth and spark an additional $400 billion in Treasury purchases by U.S. commercial banks by 2015, according to the Treasury Borrowing Advisory Committee, a committee of bond dealers and investors that advises Treasury Secretary Timothy Geithner.

Under the Basel III rules, lenders will have to comply with tougher tier 1 capital ratios within five years and will have until Jan. 1, 2019 to meet more stringent capital buffer requirements.

"The Fed may find that banks remain unwilling to move out of government-backed securities as readily as it might be hoped," Jeffrey Caughron, an associate partner at Baker Group LP, which advises community b! anks on investing $25 billion of assets told Bloomberg. "Banks are in the unenviable position of having to wait until the animal spirits creep back into the economy."

Large investors want the banks to implement the rules prior to the official deadlines, which "will probably result in banks holding more Treasury and agency securities in their portfolios and fewer loans," the Treasury Borrowing Advisory Committee said in its Nov. 2 report.

At the same time, "extension of liquidity, credit, and capital are being curtailed at a time of slow economic growth," the committee said.

"Financial institutions are less willing to take risk ahead of these new regulations than they might be otherwise," Ira Jersey, an interest-rate strategist at Credit Suisse Group AG (NYSE ADR: CS) in New York told Bloomberg. "One of the reasons to do quantitative easing is to make it less appealing to hold Treasuries. You'd expect this to be an environment where they might actually want to take on a little more risk but so far they're not."

Many analysts are pessimistic about increased lending after the previous round of quantitative easing failed to spur an increase in loans.

During the last round of quantitative easing, which ended in March, the Fed purchased $1.7 trillion of mortgage-related and Treasury debt.? Meanwhile, the banks purchased $226 billion of government securities, while commercial and industrial loans outstanding fell by $367.4 billion.

Banks say loan demand remains low after companies in the Standard & Poor's 500 Index boosted cash and equivalents to a record $2.3 trillion at the end of 2009, according to data compiled by Bloomberg.

Before companies borrow to expand, they will likely tap into their cash, Art Steinmetz, the chief investment officer in New York at Oppenheimer Funds Inc., which manages about $165 billion, told B loomberg.

"A credit crunch caused the recession; it is not accurate to run the logic in reverse and say an extension of credit will get us out of recession," Steinmetz said. "The banks will lend to good credit, but good credit is not interested in borrowing."

Indeed, large banks had $4.4 trillion in unused credit lines outstanding in 2009, as consumers and businesses shunned borrowing to pay down debt. A 32% increase in U.S. bankruptcy filings last year suggests that plenty of borrowers simply aren't creditworthy.

"Lenders aren't saying we don't want to lend. Lenders are saying we'd like to lend, but loan requests are down," James Ballentine, the senior vice president of government relations for the American Bankers Association told McClatchy. "Also the bank regulatory agencies are scrutinizing loans at a much higher level than they have been in the past. There are so many new laws and regulations that some of the smaller banks are just shutting their doors and walking away."

News & Related Story Links:

  • Bloomberg: Record Bond Buying by Banks Frustrate Bernanke Easing for Loans
  • Treasury Borrowing Advisory Committee: Minutes of Nov. 2 meeting
  • McClatchy:
    Small firms would hire you, if only they could get loans
  • Money Morning: As QE2 Looms, Is the Fed Focusing on the Wrong Things?
  • Money Morning: QE2: How New Quantitative Easing Will Launch Emerging-Market Stocks

No comments:

Post a Comment