Word: nonbanking
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...interest margin is partly a product of interest rates: banks borrow short term and lend long term, so when long-term interest rates drop below short-term rates (as happened three times in the past 15 years), margins are squeezed. But another big factor has been the rise of nonbank competitors. The barely regulated shadow-banking system of securitization, investment banks and hedge funds took lots of business away from banks. Banks responded by relying more on fee income to pay the bills, getting in on shadow banking themselves and offering easier terms on loans - the latter two with sometimes...
...stock market stormed up Thursday on good earnings news from the bank sector, but there was bad news on another front that could undermine the surge. The second round of the Federal Reserve's attempt to restart the nonbank consumer-lending market, the so-called TALF program, went even worse than the faltering first round did last month. The poor performance is causing some Fed officials to doubt the entire premise of the effort to restart nonbank credit markets. "We know there are people out there interested in putting subscriptions together," says a Fed official, "but the larger question...
...TALF program (Term Asset-Backed Securities Loan Facility), funded with up to $200 billion, was created to provide liquidity to the market for securitized nonbank consumer loans. The prospective buyers of such securities would be hedge funds and investment firms...
...last possibility may be the most worrying - that there has been a fundamental shift in the appetite for nonbank securitized loans, which previously represented some 40% of U.S. consumer lending. "The Fed and Treasury have said we're prepared to lend up to $200 billion for small business, auto, student and other kinds of loans, but what is the market for them?" says the Fed official. "You still have to figure out what the demand is at this point, because of the state of the economy and whether people are comfortable doing these [securitized nonbank loans...
...dramatic drop in demand could be either very good or very bad for traditional banks. It could mean that the nonbank, or "shadow bank," system is less appealing to borrowers than traditional banks in uncertain times, and so they are going to regular banks for loans instead. Or more ominously, it could mean there is an overall dramatic drop in borrowing, which would hurt everybody...