Credit market conditions – an update

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This post is a guest contribution by Asha Bangalore*, vice president and economist at The Northern Trust Company.

Credit market spreads have widened since early-February from the short-end to the long and risky end. As the charts below indicate, the widening of the spreads has occurred even as the Fed is acting aggressively to enhance credit availability and reduce the cost of credit.

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Clarity and action with regard to the cleaning up of balance sheets of banks appears to be necessary for credit market conditions to improve. The operation of the TALF program is another factor that should ease credit market conditions.

The first disbursement of funds under the Term Asset-Backed Securities Loan Facility (TALF) will be on March 25, 2009. The TALF program is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business asset backed securities (ABS) at more normal interest rate spreads. The charts below show the sharp jump in interest rate spreads of two asset backed securities (credit cards and auto loans) since the third quarter of 2008, followed by a small amount of narrowing.

The TALF program should reduce the unusually high risk premiums that have emerged in this sector and raise credit availability. We will be watching developments it this sector closely. The ABS markets have funded a large share of consumer credit and U.S. Small Business Administration guaranteed small business loans. Fed and Treasury support in these markets could significantly lift the availability of credit to households and small businesses and thereby contribute to a recovery of economic activity.


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Source: Northern Trust – Daily Global Commentary, March 11, 2009.

*Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

 

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