The Broader Market

by Jordan Eizenga

Legislation making its way through Congress and the Senate aims to create a resolution mechanism to wind down, in an orderly manner, struggling institutions that are deemed too big to fail. The worry is that these institutions are so large that, if they default in a disorderly manner, they could jeopardize the financial system at large.  For this reason, their failure would likely require the government to intervene (using taxpayer funds to prop up the institution).  Identifying those institutions that possess substantial systemic risk, therefore, is very important.

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by Jordan Eizenga

A recent paper from the San Francisco Federal Reserve Bank provides a fairly good assessment of the relationship between conventional lenders and CDFIs, which I wrote about a few weeks back.  The most notable part of this paper was the long term benefit of CDFI lending practices to larger financial institutions that engage in small business lending.  The authors write:

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by Jordan Eizenga

The financial crisis laid bare the fact that, during periods of substantial market turmoil, financial institutions will often face capital adequacy issues.  Deterioration in the value of assets, an increase in the cost of capital, and an inability to obtain short term financing are typical of a distressed financial institution on the brink of disaster.  To prepare for future adverse market events, one notable group of economists, the Squam Lake Working Group at the Council on Foreign Relations has proposed that financial institutions be required to issue certain quantities of long term hybrid debt instruments that contain built in conversion features (see article here). 

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by Jordan Eizenga

Business Week published a decent article yesterday touching on the credit market conditions for small businesses (see here).  It notes that commercial and industrial lending experienced a decline of $900 million to $1.27 trillion during the week ending April 14, according to data from the Federal Reserve Bank. Clearly, the macroeconomic impact of high unemployment and decreasing home prices, coupled with contracting credit markets have contributed to the inability of borrowers, especially those that service or are low income borrowers, to meet their short term obligations with financial institutions.  Often these borrowers turn to non-traditional, community oriented financial institutions, such as Community Development Financial Institutions (CDFIs) for short term pre-development and bridge loans, while they attempt to obtain more permanent debt or equity financing.  However, the deterioration in the balance sheets of traditional lenders and the consolidation of commercial and retail banks has generally reduced the availability of permanent financing for these borrowers.  Alternative sources of equity capital from public agencies have also decreased as state and local budget issues mean decreased subsidies. 

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