Bank Lending to Nonbanks Dips
Bank lending to nonbank financial firms dipped in the latest Federal Reserve figures, released after Friday’s market close. Outstanding loans fell from $2.119 trillion to $2.111 trillion in the week ended October 28, after adjusting for seasonal patterns. That still left balances above their level at the start of October. The weekly move was modest, but it brings up a question worth asking of the lenders in the Fly High universe. What will it cost them to renew the credit lines they use to fund their own loans?
The Fed’s October survey of bank loan officers gives that question some weight. Banks reported that they had tightened approval standards for several kinds of nonbank borrowers in the third quarter, including firms that finance business and mortgage loans. At the same time, banks reported stronger demand from firms that finance business credit. Outstanding balances can stay high while new borrowing gets harder to arrange. The weekly figures track how much is already owed, so a decline could reflect repayments or smaller draws on existing credit lines.
For business development companies that use bank lines to fund loans to midsize businesses, a renewal at a higher rate can leave less interest income after financing costs. Even if the rates on their existing loans hold steady, that can reduce the earnings available for dividends. A lender that can charge more on new loans or has already locked in part of its borrowing cost has more room to absorb the change. The terms matter for commercial mortgage lenders too. A smaller line can limit how many new loans they can make as old ones are repaid, which can reduce the amount of money earning interest.
Friday’s figures give us more reason to pay attention to funding renewals than to change our view of dividend support today. The decline was small, and the Fed’s broad category includes insurers and funds as well as lenders. The next useful evidence is what companies disclose about the cost and size of renewed bank lines. If they pay more for less borrowing capacity and can’t make up the difference through loan income, we’d expect the cushion behind their dividends to narrow.
Sources
- Federal Reserve bank balance sheets, November 6
- Federal Reserve bank balance sheets, October 30
- Federal Reserve October bank lending survey
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.