Newspaper article THE JOURNAL RECORD

Loan Sales Reflect Evolution in Short-Term Credit Market

Newspaper article THE JOURNAL RECORD

Loan Sales Reflect Evolution in Short-Term Credit Market

Article excerpt

Loan sales by banks and thrifts represent an evolution in the short-term credit market reflecting a response to the competitive pressures of the commercial paper market, the decline of profitability in traditional lending and increased demand for the debt of highly rated firms, according to a study in the Federal Reserve Bank of Kansas City's Economic Review.

Loan sales appear to to be a natural expansion of commercial banks' role as financial intermediaries in the continuing development of the short-term business credit market, the study said.

"Moreover, loan sales do not appear to reduce the safety and soundness of banks," the study said. "To the extent that loan sales combine the desirable aspects of traditional loans and of commercial paper, loan sales can improve efficiency and lower costs in the short-term credit market."

The importance of nonfinancial corporation commercial paper as a source of short-term credit has increased substantially over the last 15 years, the study said. Since the 1960s, the commercial market has become larger than the market for any other money instrument except Treasury bills.

The percentage share of commercial paper in the short-term bsuiness credit market has more than tripled since 1973, rising from an average of only 4 percent to 14 percent in 1986.

The 1986 share represents $82 billion in nonfinancial corporation commercial paper out of a toal of $593 billion in short-term business credit that year.

To recover some of the business lost to the commercial paper market, banks tried to place and underwrite commercial paper, but have since turned to loan sales in recent years.

To show the increase in loan sales, the study noted in the second quarter of 1983, the ratio of loans sold to commercial bank assets was 1.2 percent, or $27 billion of loan sales in 1982 dollars. By the first quarter of 1987, the loans sold to assets ratio had risen to 4 percent, or $115 billion of loan sales.

"The rise in this ratio has been even more dramatic at the 20 largest banks, where size is measured by assets," the authors of the study wrote. "The ratio of loans sold to asset at these banks rose from 1.5 percent ($12 billion) in the second quarter of 1983 to $9.1 percent ($82 billion) in the first quarter of 1987."

There are several explanations for the rise in loan sales, according to the study:

- Banks are selling loans as a substitute for not being able to sell commercial paper.

- Reduced profit margins have led banks to look for new sources of reveunues. …

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