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BusinessWeek: January 11, 1993 |
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Economic Trends
THE NEXT PERIL FOR THE PAULINES OF BANKING The study's authors, Tom Schlesinger of the Southern Finance Project and former House Banking Committee economist Jane D'Arista, note that several large finance companies have suffered severe setbacks in recent years. And more than 90% of the commercial paper issued by the 15 largest finance companies is backed by bank credit lines. Ironically, the finance companies are among the banks' biggest rivals. In the 1980s, such major finance companies as General Motors Acceptance Corp. and General Eleectric Capital Corp. began luring away the banking industry's prime business borrowers. (At last count in mid-1992, finance companies had $294 billion in outstanding loans to business--only a third less than the banks themselves.) In this hotly competitive environment, many banks turned to the lower-quality loans that later imperiled their survival. The banks also gamered fee income from their livals by providing backup credit guarantees for the commercial paper that the finance companies were issuing to fund their loans. As Schlesinger and D'Arista tell the tale, the bank credit lines made it easier for finance companies to sell commercial paper to such institutions as money-market mutual funds. And the huge in-flow of money from such sales inspired some to expand their lending to riskier areas, such as leveraged buyouts and commercial real estate. Now, some of these risks are moving on to bank balance sheets. In the past year or so, several finance companies--GMAC, Chrysler Financial, and Westinghouse Credit--suffered credit downgradings, thus restricting their access to the commercial paper market and forcing some to increase their bank borrowing. Westinghouse, for example, is drawing on a $6 billion line of credit issued by some 49 banks. All this leaves the banks in a no-win situation. If the finance companies prosper, say Schlesinger and D'Arista, they will lure away more of the banks' borrowers. If they run into more trouble, they will saddle the banks with even more risky assets. And "standing behind the banks," they add, "is the lender of last resort, the Federal Reserve, and ultimately the U.S. taxpayer." | |
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