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Cap Business Lending To Avert An Explosion Of Debt, Warns Watchdog

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http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11882126/Cap-business-lending-to-avert-an-explosion-of-debt-warns-watchdog.html

Big businesses could be racking up unsustainable heaps of debt that will do them serious harm when interest rates go up, or when there is another squeeze on the financial sector, an influential group of regulators has warned.

Banks should be forced to cap the pace of lending to businesses, or face limits on the share of new loans that they can give out, the Financial Stability Board (FSB) has said.

Borrowing in developed countries paused in the wake of the financial crisis but debts did not come down overall, and are now rising once more.

And companies in emerging markets never stopped increasing their lending relative to GDP, according to figures from the FSB, which is a group of international financial regulators, chaired by Mark Carney.

Debts in non-financial firms in developed economies stand at around $45 trillion (£26 trillion), up from $30 trillion a decade ago, while those in emerging markets rose from below $5 trillion in 2005 to around $22 trillion by the end of 2014.

The FSB fears that the recent slowdown in economic growth in emerging markets could put at risk firms’ ability to cope with such a debt burden.

One option is to tell banks to hold even bigger capital buffers against corporate lending, making them more resilient in a downturn. However this would also make lending more expensive and so limit its supply.

“Caps on the growth rate of new credit or the share of new corporate loans could also be considered,” the FSB said.

So over the weekend we've had talk of negative rates now they are talking about a cap on business lending!

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Debts in non-financial firms in developed economies stand at around $45 trillion (£26 trillion), up from $30 trillion a decade ago, while those in emerging markets rose from below $5 trillion in 2005 to around $22 trillion by the end of 2014.

To outline some of that risk, in a simple way. Below was transcript from Paul Hodge's interview, January 2015.

And we’ve seen that, the oil price down 50%, the dollar up over 10%. Now the dollar going up 10%, absolutely critical because you’ve got $6 or $7 Trillion dollars of debt in the emerging economies all tied to the dollar, all thinking, “Well we’ve borrowed at 1%, aren’t we clever.” Well it was 1% then, but now it’s 1% + 12% increase in the dollar.

[..] I think UK house prices are already falling. I just wish they had never got to these levels. I think you're going to see.. the top end prices have begun to fall 15-20%. We've seen price falls in the early 90s fall 50%; I think we're at the start if that kind of decline. I'm not depressed about this; it's something we have to go through to get to reality. Cash is actually going to be a very good investment, because under deflation, the value of cash goes up every day. It's already happening, we're going through deflation shock. The cost of a house is relative to earnings. The thing that Minsky highlighted was that you have to be able to repay the capital. My sons have been priced out of the market. It's all well and good to say they could afford the interest, they could, but they can't afford the capital repayment. So for their good, for the good of younger generations, I'm afraid us old generation have to say, "We did pretty well out of this, we have to hand something back."

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The report's about the liability structure of corporates and leverage (debt to equity) inc tax distortions re. financial stability, not small business lending. Although I don't know whether imposing targeted hurdles to corporate lending might be practically used by banks to further ration small business lending (or increase it, or just increase consumer credit - something they refer to). http://www.financialstabilityboard.org/wp-content/uploads/Corporate-funding-structures-and-incentives.pdf

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Is this talk of NIRP and simultaneously putting a ceiling on lending, just different aspects of the impossible task of getting all the toothpaste back in the tube after last night's toothpaste party?

Edited by Si1

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The report's about the liability structure of corporates and leverage (debt to equity) inc tax distortions re. financial stability, not small business lending. Although I don't know whether imposing targeted hurdles to corporate lending might be practically used by banks to further ration small business lending (or increase it, or just increase consumer credit - something they refer to). http://www.financialstabilityboard.org/wp-content/uploads/Corporate-funding-structures-and-incentives.pdf

Aren't they trying to reduce misallocation of capital without raising interest rates? Won't that just force another bubble somewhere unexpected that they haven't cracked down on yet?

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Aren't they trying to reduce misallocation of capital without raising interest rates? Won't that just force another bubble somewhere unexpected that they haven't cracked down on yet?

No idea really, because whatever this suggests it still has to merge with a reality that appears to involve juggling problematic long-term trends while also protecting the contrary interests of asset and unearned wealth.

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No idea really, because whatever this suggests it still has to merge with a reality that appears to involve juggling problematic long-term trends while also protecting the contrary interests of asset and unearned wealth.

Yes. They appear to be terrified of the resolution of that contradiction.

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Yes. They appear to be terrified of the resolution of that contradiction.

I doubt they're that terrified when however contradictory or erroneous, it's also deliberate and probably someone else's problem.

Central banks and the wider system may be effecting misallocation and inequities, but they don't determine real incentives and outcomes alone. Alternative fiscal and social choices could change it, but instead most public-interest leadership has crawled under a rock to die leaving remaining opinion free to pursue whatever agenda most suits them and the loudest interest-group voices.

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I doubt they're that terrified when however contradictory or erroneous, it's also deliberate and probably someone else's problem.

Central banks and the wider system may be effecting misallocation and inequities, but they don't determine real incentives and outcomes alone. Alternative fiscal and social choices could change it, but instead most public-interest leadership has crawled under a rock to die leaving remaining opinion free to pursue whatever agenda most suits them and the loudest interest-group voices.

But that's just because one loud interest group drowns out all the others, no?

What happens to the policy setters when they start hearing dissenting voices? Are they already doing so?

Edited by Si1

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It sounds as if the "regulators" don't trust UK companies to make investment decisions that would enable them to make sufficient real profits to be able to pay back debt. Nothing worth investing in?

Maybe they don't trust "big businesses" not to just take on debt just for the sake of it purely to do stuff like warp the accounts with share buy backs etc and to enable and to pay /directorsthemselves huge bonuses - eventually leading to bankruptcy when interest rates rise.

Whatever it is regulators having such a opinion on and say in investment decisions is another symptom of how wrecked, stagnant and immobile the UK economy is.

Edited by billybong

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But that's just because one loud interest group drowns out all the others, no?

What happens to the policy setters when they start hearing dissenting voices? Are they already doing so?

It doesn't seem to matter so far how wrong or ill informed or unjust the winner's formula is, or relative numbers, because the equally nonsensical justifications aren't simply and coherently questioned. Dissent that can't agree on core reasoning, can't accept that some things can be apolitical, and can't accept compromise on some biases to achieve a greater goal remains splintered and easy to undermine or disregard - including within policymaker circles.

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