EC Risk Assets: ‘Nothing Can Go Wrong’

Commercial Banks Increase Lending to Business

Ever since the Fed’s ‘QE tapering’ began, the annual growth rate of broad US money TMS-2 has actually not declined further (that may however change, as there have recently been two back-to-back monthly declines). The main reason for this is that commercial banks have ‘taken the baton’ from the Fed and have expanded their lending to corporations at an accelerating rate. Thus we find that commercial and industrial loans have recently expanded at a more than 11% pace year-on-year (not seasonally adjusted: we prefer to look at actual numbers instead of statistically smoothed ones. As Lee Adler often mentions, this is the best way to ascertain what is really going on). 

Commercial and industrial loans, year-on-year growth, not seasonally adjusted – click to enlarge.

In early May, we already wrote about the blistering business in CLOs (see: “Embracing Leverage Again”), describing how banks are eagerly helping investors not only with buying the corporate equivalent of sub-prime CDOs, but enabling them to do so at up to 1:10 leverage. We also commented on the enormous surge in leveraged loan issuance in March, and have frequently discussed how PIK bonds, ‘frontier market’ debt and other junk securities are gobbled up by yield-chasing investors as if they were the best thing since sliced bread. As of yet, there seems to be no let-up. Zerohedge has just discussed the topic as well, in the wake of a Bloomberg article that describes how banks are getting around the limitations imposed by the so-called ‘Volcker rule’ so as to continue CLO production to their hearts content. It is worth excerpting the first paragraph of the article:

“The business of bundling junk-rated corporate loans into top-rated securities is booming like never before following the implementation of regulation aimed at making the financial system safer.

More than $46 billion of collateralized loan obligations have been raised this year in the U.S. through the end of May, after $82 billion were sold in all of 2013, according to Royal Bank of Scotland Group Plc. JPMorgan Chase & Co. boosted its annual forecast to as much as $100 billion, which means 2014 may end up as the biggest year on record, while Onex Corp. said yesterday it will expand its CLO business.”

So here we have packages of junk loans that are masquerading as highly rated securities, just as in the last boom.  Only this time, the focus is on corporate junk instead of sub-prime residential mortgages.