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U.S. CREDIT FLOWS DURING THE FOURTH QUARTER SHOW STRESS ON HOUSEHOLDS AND FIRMS

U.S. CREDIT FLOWS DURING THE FOURTH QUARTER SHOW STRESS ON HOUSEHOLDS AND FIRMS

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U.S. CREDIT FLOWS DURING THE FOURTH QUARTER SHOW STRESS ON HOUSEHOLDS AND FIRMS
U.S. CREDIT FLOWS DURING THE FOURTH QUARTER SHOW STRESS ON HOUSEHOLDS AND FIRMS

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Published by: International Business Times on Mar 24, 2009
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www.td.com/economics
U.S. Credit Flows During the Fourth QuarterMarch 24, 20091
TD Economics
U.S. CREDIT FLOWS DURING THE FOURTH QUARTERSHOW STRESS ON HOUSEHOLDS AND FIRMS
March 24, 2009
Special Report
The U.S. Federal Reserve’s Flow of Funds Statisticsprovides a vivid picture of the effects of the credit crunchduring the fourth quarter of 2008. Credit market turmoilintensified in the wake of Lehman Brothers’ collapse inSeptember. The subsequent quarter witnessed a massivecontraction in overall borrowing by households, led by anintensifying decline in residential mortgages. With a sag inprofits, firms’ access to new funds has diminished consid-erably overall. Borrowing by non-financial corporationsthrough market instruments has slowed considerably –particularly with the retreat of foreign loans and the col-lapse of the highly-securitized “shadow banking” system(see text-box). However, there was a significant offsetfrom a rapid pick-up of foreign direct investment (FDI)into the United States.For non-financial corporations, the newer, non-traditionalsources of funds available in recent years have now evapo-
HIGHLIGHTS
U.S. household credit contracted by US$76.8billion in the fourth quarter – its first contractionsince 1975 and its largest ever as a share ofnominal GDP.Consumer credit tightened dramatically, andmortgages contracted for the third consecutivequarter, registering a US$36 billion annual con-traction.Access to non-market debt by U.S. firms has de-clined, particularly as a result of declining loansby foreigners, slowing of syndicated lending,and deleveraging of the “shadow banking” sys-tem.As foreigners rapidly purchased equity stakesin U.S. firms, foreign direct investment (FDI) ex-panded by US$65 billion during the quarter andUS$154 billion during 2008 – its greatest expan-sion since 1999.Lending by commercial banks has slowed con-siderably, and household credit from savings in-stitutions contracted severely – particularly inresidential mortgages.The quarterly statistics show a definite droughtof credit for U.S. consumers and much worsenedflows for U.S. firms.
rated, and traditional U.S. credit intermediaries – commer-cial banks and savings institutions (see text-box) – appeartoo weakened to fill the gap. Neither do households ap-pear to have adequate access to credit. From quarterlystatistics provided by the U.S. Federal Deposit InsuranceCorporation (FDIC),
1
U.S. commercial banks dramatically
U.S. BORROWING THROUGHCREDIT INSTRUMENTS
-400-20002004006008001,0001,2001,4001,600
1   9   6   5  1   9  7   0  1   9  7   5  1   9   8   0  1   9   8   5  1   9   9   0  1   9   9   5  2   0   0   0  2   0   0   5  
-400-20002004006008001,0001,2001,4001,600
US$ Billion (SAAR*) US$ Billion (SAAR*)HouseholdsNon-Financial Corporations (Non-Farm)* Seasonally-Adjusted Annual RatesSource: U.S. Federal Reserve
 
www.td.com/economics
U.S. Credit Flows During the Fourth QuarterMarch 24, 20092
In the U.S., traditional lending institutions take de-posits and make loans. These are broadly divided intocommercial banks and savings institutions. Commercialbanks are typically federally-chartered and directly regu-lated by the Federal Reserve Bank of their respective re-gion, but may also be state-chartered. Commercial banksissue demand (or “chequable”) and time (or “savings”)deposits as well as obtain financing from federal fundspurchases and security repurchase agreements. Theythen use these funds to make direct loans to householdsand firms, as well as to purchase government and mu-nicipal securities. The commercial banking sector in-cludes U.S.-chartered commercial banks, branches offoreign banks, bank holding companies and banks inU.S.-affiliated areas (e.g. Virgin Islands or Puerto Rico).Although the lines have blurred considerably, saving in-stitutions are distinguished from commercial bank by theirfocus on household lending. Mortgages comprise 60%to 70% of savings institutions’ total assets whereas com-mercial banks have around a 40% share in mortgagesand a stronger tilt towards business lending. While com-mercial banks and savings institutions represented over50% of U.S. credit in the early 1980s, their share hasfallen to under 30% at present.The other traditional pillars of the financial system,pensions and insurance companies, have also experi-enced a relative decline in importance. Government-spon-sored enterprises (GSEs) have come to play a muchlarger role in the provision of credit. On the mortgagelending side, GSEs include Fannie Mae, Freddie Mac,
An Overview of U.S. Financial Institutions
and the 12 Federal Home Loan Banks, but GSEs arealso active in agricultural lending and, prior to 1995, SallieMae provided student loans as a GSE.Mutual funds, exchange-traded funds and money mar-ket mutual funds have also grown considerably as pro-viders of credit. Although these are often lumped underthe “Shadow Banking” designation, we consider them asseparate.Finance companies are non-depository institutionswho cover a breadth of loan types, but focus especiallyon consumer loans and leasing, as well as trade ac-counts. These include lenders like GMAC and GE Capi-tal. During the last decades, their on-balance sheet as-sets have remained relatively stable as a share of totalcredit by the financial sector. However, lending by fi-nance companies sharply contracted in the fourth quar-ter of 2008. Because these entities have been strongoriginators of loans for securitization, they are often re-garded as major “shadow banking” players. However, theirsecuritized lending is held under contract within a sepa-rate book-keeping entity, referred to as a Special Pur-pose Vehicle (SPV).The “shadow banking” system refers to non-deposi-tory and non-traditional intermediaries engaged in lend-ing to households and businesses. It colloquially refersto broker-dealers, hedge funds, private equity groups,structured investment vehicles and conduits, and non-bank mortgage lenders. In particular, we use this termwith reference to issuers of Asset-Backed Securities(ABSs) and securitizers of mortgage pools. Particularly
ISSUERS OF ASSET-BACKED SECURITIES
-15%-10%-5%0%5%10%15%20%25%30%35%
1   9   9  7  1   9   9   8  1   9   9   9  2   0   0   0  2   0   0  1  2   0   0  2  2   0   0   3  2   0   0  4  2   0   0   5  2   0   0   6  2   0   0  7  2   0   0   8  
-6%-4%-2%0%2%4%6%8%10%12%14%
Y/Y % Change % of Credit by Financial Sector Source: U.S. Federal ReserveGrowth in Assets(Left Scale)% of Fin. Sector (Right Scale)
COMMERCIAL BANKSAND SAVINGS INSTITUTIONS
-5%0%5%10%15%20%25%30%
1   9   8  4  1   9   8   6  1   9   8   8  1   9   9   0  1   9   9  2  1   9   9  4  1   9   9   6  1   9   9   8  2   0   0   0  2   0   0  2  2   0   0  4  2   0   0   6  2   0   0   8  
-10%0%10%20%30%40%50%60%
Y/Y % Change % of Financial Sector CreditSource: U.S. Federal ReserveGrowth in Assets(Left Scale)% of Fin. Sector (Right Scale)
 
www.td.com/economics
U.S. Credit Flows During the Fourth QuarterMarch 24, 20093
slowed their growth in lending to households and firms inthe fourth quarter. Meanwhile, outstanding credit fromsavings institutions to households contracted by a whop-ping 24% year-over-year.
U.S. Households’ Borrowing Shrinks
The contraction in U.S. household borrowing is bothdramatic and nearly unprecedented. Perhaps most impor-tantly, household mortgages contracted for the past threequarters and have now experienced an annual contraction,falling by US$ 36 billion during 2008. U.S. household mort-gages had never contracted on a quarterly basis prior tothe second quarter of 2008 and this represents their firstever annual contraction. This tightening highlights the tur-moil in U.S. housing markets. The nation-wide housingdownturn would certainly point to a halt in mortgage creditgrowth. During 2008, existing home sales fell 14%, hous-ing starts plummeted 40% and home prices plunged 15%.
3
Nonetheless, the contraction in mortgages suggests thatmore than the decline in demand was at work. It seemsclear that there was a tightening in supply, reflecting risingrisks associated with a surge in mortgage delinquenciesand foreclosures, and due to the deterioration in financialconditions of many mortgage lenders. The Federal Re-serve’s Senior Loan Officer Survey provides a snapshotof the lending conditions in the United States. It exhibitsthe tightening standards for mortgages by lenders andwaning demand from borrowers during 2008. Moreover,
An Overview of U.S. Financial Institutions
(continued) 
during the past decade, these entities became majorsources of funds, spurring the “shadow banking” systemfrom under 7% of U.S. credit in 1983 to 28%.
1
TheseSPVs issue securities backed by pools of mortgages,loans and consumer credit. While often originated fromcommercial banks, savings institutions or finance com-panies, securitized ABSs are taken off balance-sheet.Credit extended by ABS issuers grew at an average paceof 19% annually between 1998 and 2007, but has con-tracted precipitously since the second quarter of 2008.At its peak in 2007, this sector represented 12.6% ofassets held by the U.S. financial sector, having well sur-passed the holdings of mutual funds and other institu-tional players. Mortgage pools were also in rapid as-cendance during the past 25 years, averaging 13% an-nual growth since 1983.
19831990200120062008
Monetary Authority 3.3% 2.4% 2.4% 2.3% 2.5%
Depository Lenders
53.4% 41.4% 30.1% 30.6% 29.5%Commercial Banks 33.7% 27.9% 23.2% 24.1% 24.3%Savings Institutions 18.2% 11.8% 5.0% 4.6% 3.4%Credit Unions 1.4% 1.7% 1.9% 1.9% 1.8%
Other Non-Depository Inst.
33.4% 33.1% 31.9% 28.9% 26.7%Insurers 13.5% 14.9% 11.5% 10.9% 9.6%Pension & Gov't Retirement Funds 9.7% 8.8% 5.9% 4.8% 4.8%GSEs 4.9% 3.8% 9.3% 7.8% 7.7%Finance Companies 5.3% 5.7% 5.2% 5.4% 4.6%
Funds and Trusts
3.3% 7.6% 12.7% 11.3% 13.4%Money Market Funds 2.5% 3.7% 7.0% 4.7% 6.9%Mutual & Ex.-Traded Funds 0.7% 3.6% 5.5% 5.9% 6.0%REITS 0.1% 0.2% 0.2% 0.8% 0.5%
"Shadow Banking" System
6.7% 15.5% 22.9% 26.9% 27.9%Securities Brokers 0.5% 1.1% 1.4% 1.8% 1.8%Closed Funds 0.1% 0.4% 0.5% 0.5% 0.3%Mortgage Pools 5.1% 10.3% 12.6% 11.5% 12.8% ABS Issuers 0.1% 2.5% 7.4% 12.2% 10.2%Funding Companies 1.0% 1.3% 1.0% 0.9% 2.7%
Proportion of financial sector credit held at end of year, for selected yearsFINANCIAL SECTOR ASSETS IN CREDIT INSTRUMENTS
Source: U.S. Federal Reserve

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