A Little Doomsdayish but Still Highlights Problem

[cm husker]

With legislative action having all sorts of unintended consequences.

 

http://www.bloomberg.com/gadfly/articles/2016-03-28/the-next-perfect-banking-storm

 

Of particular note is the way this regulation benefits existing large corporations at the expense of new and smaller competitors.

 

It also highlights how lawyering and regulating are becoming "growth" industries that are a huge drag on the rest of the economy.

[TGHusker]

As a trade credit professional( I work for a manufacturing company), this is just another layer of issues I need to watch. The article is correct in stating that the affects will be felt prior to 2017. B2B credit terms will be affected as well as credit professionals necessarily become more conservative in their granting of favorable credit terms. This will place a heavier drag on the economy - at a time when businesses need to expand by being willing to take on more risk - to grow in a slow economy sometimes you need to take on new customers who may have less than ideal credit (liberal credit terms upfront/strong collections after the sale). In our industry, we are heavily dependent on higher oil prices so our customers (refineries, petro-chemical plants, etc) can order new equipment. So are market is slow as it is. These new regs will place greater pressure on companies and we'll probably see slower payment, requests for longer payment terms, while we also maintain a watchful eye on bankruptcy action.

[NUance]

IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.

 

 

Heh. This is laughable. It will increase the reporting and visibility of nonperforming assets. It won't affect the underlying scofflaw businesses who are late on their loan payments, or the assets (loans) themselves.

[BigRedBuster]

 

IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.

 

 

Heh. This is laughable. It will increase the reporting and visibility of nonperforming assets. It won't affect the underlying scofflaw businesses who are late on their loan payments, or the assets (loans) themselves.

 

I think the issue is that non-performing assets on their balance sheet causes them to have more reserves at the bank. Yes, it doesn't change the actual loan. But, if more loans are classified earlier as "non-performing", that will cause the bank to have to increase their reserves which makes it harder for them to loan money.

 

I'm not necessarily seeing this one thing as a bad thing on the surface. I am not surprised that the banking industry doesn't like it though.

[NUance]

 

 

IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.

 

 

Heh. This is laughable. It will increase the reporting and visibility of nonperforming assets. It won't affect the underlying scofflaw businesses who are late on their loan payments, or the assets (loans) themselves.

 

I think the issue is that non-performing assets on their balance sheet causes them to have more reserves at the bank. Yes, it doesn't change the actual loan. But, if more loans are classified earlier as "non-performing", that will cause the bank to have to increase their reserves which makes it harder for them to loan money.

 

I'm not necessarily seeing this one thing as a bad thing on the surface. I am not surprised that the banking industry doesn't like it though.

 

 

Maybe we *should* make it harder for the banks that make bad loans to loan more money.

[TGHusker]

 

 

 

IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.

 

 

Heh. This is laughable. It will increase the reporting and visibility of nonperforming assets. It won't affect the underlying scofflaw businesses who are late on their loan payments, or the assets (loans) themselves.

 

I think the issue is that non-performing assets on their balance sheet causes them to have more reserves at the bank. Yes, it doesn't change the actual loan. But, if more loans are classified earlier as "non-performing", that will cause the bank to have to increase their reserves which makes it harder for them to loan money.

 

I'm not necessarily seeing this one thing as a bad thing on the surface. I am not surprised that the banking industry doesn't like it though.

 

 

Maybe we *should* make it harder for the banks that make bad loans to loan more money.

 

I think that would be the govt regulating itself. As in the case of the housing bust of 2007-8. Housing regs pushed banks to issue home loans to individuals wt less than stellar credit. Govt regs - mixed wt banking greed - were behind the bust.

[cm husker]

Exactly.

 

Here's a simple example of the problem:

 

individual (or business's) credit rating indicates they are a moderate credit risk and should be charged $8 for every $100 borrowed.

 

Individual with high rating can obtaining $100 for $4.

Government looks at this and says "wait, if the person with the poor rating (typically poor, young or otherwise risky) can afford $8, then obviously it's more 'fair' to charge them the $4 that good credit risk people receive."

 

So, the government tells the lender, either give the person a "fair" rate but ignores that this requires the lender to assume the aggregate risk associated with a pool of high risk borrowers. So, either the lender has to assume that risk and take business losses, has to stop lending to the high risk people at all, or has to look to government to underwrite/insure these risky loans (which is what we see happening, for example, in student loans). The other thing that happens is that low credit risk borrowers have to subsidize the high risk borrowers by paying higher interest rates than they otherwise would (again, we see this in student loan markets).

 

Relative to business lending, I see it more going along the lines of "we'll just stop lending to these risky borrowers" and that's a really really really bad thing for the economy in aggregate.

Because lending is just an efficient form of reallocating available capital (a representation of productivity), and there are serious implications associated with freezing those markets.

[BigRedBuster]

 

 

 

 

IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.

 

 

Heh. This is laughable. It will increase the reporting and visibility of nonperforming assets. It won't affect the underlying scofflaw businesses who are late on their loan payments, or the assets (loans) themselves.

 

I think the issue is that non-performing assets on their balance sheet causes them to have more reserves at the bank. Yes, it doesn't change the actual loan. But, if more loans are classified earlier as "non-performing", that will cause the bank to have to increase their reserves which makes it harder for them to loan money.

 

I'm not necessarily seeing this one thing as a bad thing on the surface. I am not surprised that the banking industry doesn't like it though.

 

 

Maybe we *should* make it harder for the banks that make bad loans to loan more money.

 

I think that would be the govt regulating itself. As in the case of the housing bust of 2007-8. Housing regs pushed banks to issue home loans to individuals wt less than stellar credit. Govt regs - mixed wt banking greed - were behind the bust.

 

Actually, if you look back over the 5-10 years prior to the crash, Clinton politically pushed for lowering of bank criteria on home loans in an effort to promote home ownership to lower income and minority people. That lowering of criteria was then used to give mortgages to people in all economic groups that they absolutely should never have been able to get. This created a HUGE number of home owners that were barely making house payments no matter if they were in a $30,000 home or a $500,000 home.

 

Then some other things happened like skyrocketing fuel prices and the house of cards started falling.

 

I am getting the feeling that some of the mortgage crap that was going on started up again in some areas. I'm not against making sure that doesn't happen again.

 

Now....saying that, business lending is a major component of our economy. Without it, many things come to a stand still.

 

I have joked with other business owners that since 2007, the only way to get a business loan is if you don't need one. That's not workable.

[TGHusker]

Oh the web we spin when we think govt fixes all.