Lending a Helping Hand

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Credit Redux

JACKSON HOLE, Wyo. -- A few more notes on credit in the wake of much response to the yield curve column that appeared

yesterday:

  • Ought to have mentioned that if the curve stays flat (or inverted) long enough to damage lending, then surely it doesn't matter one whit how it got that way. But the point was that the curve has been flattening steadily and significantly, especially since April 1997, and one would have reasonably expected to see a material credit deceleration by now. Spreads may well have now hit the point where this is finally happening, but it hasn't yet shown up in the data.
  • Perhaps it will do so soon. One reader says a regional (Southeast) banking acquaintance is "really torn right now. On one hand he has stockholders that demand higher earnings to create higher prices for the stock. On the other hand he says that loan spreads are so tight that he needs twice as many loans (has to run twice as fast, as he puts it) now to make the same money as two years ago. As the curve has now inverted, he said his bank is actually in the process of having to turn down loans because the bank can't make money. He worries how his shareholders will react." (Reader goes on to postulate that banks are simply issuing more loans at smaller spreads to at least tread water.)
  • Or perhaps it won't. Another reader says "the fact is that prime rate is still 8.50% and the fed funds rate is 5.50%. Rates on deposits are even lower (2% to 3%). We have unprecedented spreads in the banking industry (4% to 5%). Banks are falling over themselves looking for customers. Credit-card rates are still high. Long-term loans are usually match-funded or GAP principles apply. The presently outrageously high fed-funds rate is not preventing the banks from lending. Just the contrary."
  • Yet another reader says the fact that mortgage rates have lagged the bond down is telling (this column agrees). Since April 1997, the bond yield has plunged to 5.47% from 7.09% (a decline of 162 basis points) while mortgage rates have fallen to 6.95% from 8.14% (119 basis points). Demand is clearly still hot enough that banks are still making money in this area.
  • And the regulators are rightly concerned. Nine weeks ago the Fed sent a letter to banks to "remind" them to practice safe lending practices, such as the "use of formal forward-looking analysis in the loan approval process." (That means some analysis is neither formal nor forward-looking, right? Oh, boy.) The letter mentioned that "banks have been easing their lending terms and standards, largely because of intense competition to attract customers. This easing has occurred during a period of strong economic growth and stable market conditions."
  • Three weeks later the Comptroller of the Currencyblasted banks for such behavior. She concluded that "the problems we are seeing in the banking system today are serious. They could presage the same kinds of problems that afflicted the industry nearly a decade ago. But history does not have to repeat itself. Bankers have the opportunity to take the steps necessary to better contain their credit risk going forward. The time for that action is now."
  • Yesterday the Fed released the August version of its survey of senior loan officers. Tightening of lending standards has not yet begun...

New Math

Beginning with January 1999 data, the

Bureau of Labor Statistics

will use a new formula to calculate the basic components of the

Consumer Price Index for all Urban Consumers

, or CPI-U. Suffice it to say that the new calculations are intended to make the CPI more closely approximate the real world (though do read

all

about it on your own). Today the BLS released experimental

data

for July.

The table below shows four inflation variables. CPI-U is the consumer price index as we know it now, while CPI-U-XG is its experimental counterpart. Likewise, Core CPI-U is the standard core consumer price index and Core CPI-U-XG is its experimental counterpart.

The geometric mean calculations produce lower inflation rates without exception. (The BLS reckons that the use of the geometric mean formula in all CPI basic indexes would lower the growth rate of the index by approximately one quarter of 1% per year.) The gaps between new and old numbers were relatively big in 1991 (0.8% and 0.9%, respectively). But since then, they have gradually decreased, and as of last month, they had almost disappeared.

Side Dish

Obuchi

says full disclosure of banks' financial status might be inappropriate because it might cause unnecessary confusion with the public. Right. Wouldn't want to confound the populace by teaching them the difference between solvent and bankrupt.