Survey of Finance Companies, 2000
Dynan, Karen E., Johnson, Kathleen W., Slowinski, Samuel M., Grothe, Greg D., Leddon, Hank, Federal Reserve Bulletin
Finance companies are important providers of credit to households and businesses. For households, they originate loans and leases to finance the purchase of consumer goods such as automobiles, furniture, and household appliances; they also extend personal cash loans and loans secured by junior liens on real estate, such as home equity loans. For businesses, they supply short- and intermediate-term credit (including leases) for such purposes as the purchase of equipment and motor vehicles and the financing of inventories. (1)
With roughly $1 trillion in financial assets as of mid-2000, the finance company sector occupies an intermediate position among the sectors that typically lend to households and businesses: In terms of assets, it is more than twice as large as the credit union sector, about the same size as the thrift sector, but only about one-fifth as large as the commercial banking sector. The approximately 1,000 companies that make up the sector (down from about 1,200 in 1996) range in size from very small to very large and include the "captive" subsidiary finance companies of motor vehicle manufacturers. The companies tend to be diversified, with more than 90 percent of the sector's assets as of mid-2000 held by companies that did not concentrate in any one type of receivable. The larger firms are more likely to be diversified; of the small firms that specialize, most focus on short- and intermediate-term business receivables. The sector is quite concentrated, and has been for some time, with the twenty largest companies accounting for more than two-thirds of total receivables (see box "Industry Concentration").
The Federal Reserve System has surveyed the assets and liabilities of finance companies at roughly five-year intervals since 1955. The surveys provide benchmarks for the System's monthly report on the outstanding accounts receivable of finance companies and provide a comprehensive update on these companies' sources of funds. This information in turn becomes an important input to the estimates of total consumer credit and the U.S. flow of funds accounts produced at the Federal Reserve Board. Summarized in this article are the results of the most recent survey, which collected finance company balance sheet information as of June 30, 2000. (Details on sampling procedures are given in appendix A, and complete balance sheet data are provided in table B.1.)
FINANCE COMPANY RECEIVABLES
The total value of receivables owned or securitized by finance companies increased nearly 50 percent between 1996 and 2000, or approximately 11 percent a year on average (table 1). (2) The gain occurred against a backdrop of brisk economic expansion, with nominal gross domestic product increasing at an average annual rate of about 6 percent over the period. Business lending remained the largest major line of activity, accounting for just under half of all receivables. There was apparently some shift between the other two major lines of activity, however. The share of total receivables accounted for by consumer lending and leasing declined 2 percentage points (to 39 percent); that decline was matched by a comparable rise in the share accounted for by real estate loans (to 17 percent). With most real estate receivables at finance companies being home equity loans, this shift may indicate that households have been substituting lower-cost, collateralized home equity loans for high-cost, uncollateralized consumer loans as a source of credit.
Finance companies sometimes securitize their loans by pooling them and selling them to a bankruptcy-remote entity, which then sells securities backed by the revenue stream generated by the loans. (3) A securitized loan is removed from the finance company's balance sheet, although the company typically continues to collect the service payment and would bear the cost of a default. (4) After rising rapidly in the early 1990s, when securitization was a relatively new practice, the proportion of finance company loans that was securitized increased only moderately in the late 1990s, from 16 percent in 1996 to 18 percent in 2000.
Finance companies owned or had securitized $503 billion in business receivables as of June 30, 2000, accounting for roughly 8 percent of total nonfinancial business credit and close to 22 percent of short- and intermediate-term business credit (table 2). Between 1996 and 2000, finance company business receivables increased at an average annual rate of 10 percent, approximately matching the rates of growth of alternative sources of short-term business finance, such as bank loans, and longer-term instruments, such as corporate bonds and mortgages. As a result, finance companies maintained their share of the market for nonfinancial business credit over the intrasurvey period.
Finance companies appear to be an important source of funds for small businesses--firms with fewer than 500 employees. In 1998, about 14 percent of all small businesses, and roughly 30 percent of small businesses with more than 100 employees or annual sales totaling more than $10 million, used finance companies for loans, leases, and financial management. Small businesses used finance companies mainly for motor vehicle loans and capital leases, areas in which finance companies specialize. Small businesses were only slightly less likely to use a finance company than a commercial bank to finance their motor vehicle purchases and were equally likely to use a finance company or a commercial bank for their capital leases. (5)
Although the overall importance of finance companies in the business credit market apparently remained stable between 1996 and 2000, there were a few shifts in the composition of finance company business lending. These shifts included movements from owned toward securitized equipment loans, from business financing for investment in equipment and motor vehicles toward other types of business finance, and from loans to purchase business motor vehicles toward leases.
Loans and leases for business equipment (other than motor vehicles) accounted for close to 60 percent of total finance company business receivables in 2000 (table 3). Such funding typically supports business investment in such items as construction equipment, aircraft, and computers and other office machines. Although the growth of equipment loans and leases tends to be correlated with the growth of business investment in equipment, finance company equipment loans and leases expanded at an average annual rate of 9 percent between 1996 and 2000, somewhat less than the 11 percent average annual increase in investment in business equipment and software (excluding motor vehicles) over the period. For comparison, commercial paper and commercial and industrial loans extended by commercial banks--other sources of short- and intermediate-term business debt that may be used to finance equipment investment--rose at average annual rates of 13 percent and 12 percent, respectively, over the period.
Equipment leases, which account for the lion's share of equipment receivables at finance companies, increased at an average annual rate of about 9 percent between 1996 and 2000. (6) Despite the considerable size of their equipment lease portfolios, finance companies as a whole generally keep these receivables on their balance sheets rather than securitize them. Indeed, only about 3 percent of equipment leases were in securitized pools in 2000. Nonetheless, some small finance companies securitize a large portion of their equipment lease portfolios.
Overall, equipment loans rose at an average annual rate of 8 percent between surveys. Although securitized equipment loans increased much faster (34 percent annually), they continue to account for only a small share of total equipment receivables--about 6 percent in 2000.
Wholesale Motor Vehicle Finance
Wholesale motor vehicle loans, which are supplied mainly by the captive subsidiary finance companies of motor vehicle manufacturers, are typically used by automobile dealers to finance their inventories (an activity known as floor-planning). Receivables at finance companies from this activity increased roughly 5 percent a year between surveys, to $65 billion in 2000. As a proportion of total business receivables, however, wholesale motor vehicle loans fell from 16 percent to 13 percent. About 40 percent of wholesale automobile loans were securitized, almost exclusively by the captive financing arms of the Big Three automakers (Chrysler Financial Corporation, Ford Motor Credit, and General Motors Acceptance Corporation).
The growth between 1996 and 2000 of wholesale motor vehicle loans extended by finance companies tracked the growth of inventories at automobile dealers quite closely (chart 1). The rates of growth remained stable until mid-1998, when automobile sales surged. At that time, dealers increased their inventories sharply in order to keep their days' supply of vehicles roughly constant, and they stepped up their borrowing to finance the increase.
Business Retail Motor Vehicle Finance
Finance companies also provide credit for the retail sale to businesses of passenger cars and commercial vehicles such as trucks, buses, taxicabs, and truck trailers. Between 1996 and 2000, retail motor vehicle receivables at finance companies increased an average of 4 percent annually, generally mirroring the expansion of business investment in automobiles and trucks. There has been a clear trend in business retail motor vehicle financing toward leasing. The business retail motor vehicle lease portfolios of finance companies expanded an average of almost 24 percent annually between surveys, and in 2000 leases accounted for just under half of all business retail motor vehicle financing by finance companies. In contrast, finance companies' retail motor vehicle loan portfolios declined an average of 4 percent a year between surveys.
Other Business Receivables
"Other business receivables" include commercial accounts receivable, factored commercial accounts, floor-plan loans to dealers in non-automotive goods, and small cash loans to businesses and farms. (7) Financing in this category rose rapidly between 1996 and 2000, increasing from about 14 percent of total business receivables at finance companies to roughly 21 percent. However, little quantitative information is available to …
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Publication information: Article title: Survey of Finance Companies, 2000. Contributors: Dynan, Karen E. - Author, Johnson, Kathleen W. - Author, Slowinski, Samuel M. - Author, Grothe, Greg D. - Author, Leddon, Hank - Author. Journal title: Federal Reserve Bulletin. Volume: 88. Issue: 1 Publication date: January 2002. Page number: 1+. © 1999 Board of Governors of the Federal Reserve System. COPYRIGHT 2002 Gale Group.
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