fundmanageR, linneman
df <- fundManageR::fred_symbols(symbols = "LLBFRIM027SBOG", nest_data = F)Parsed: https://fred.stlouisfed.org/graph/graph-data.php?id=LLBFRIM027SBOG&transformation=lin
Returned 592 values for LOANS AND LEASES IN BANK CREDIT, FOREIGN-RELATED INSTITUTIONS from 1973-01-01 to 2022-04-01fundManageR::plot_time_series_static(df, plot_labels = F)
Parsed: https://fred.stlouisfed.org/graph/graph-data.php?id=LLBFRIM027SBOG&transformation=lin
Returned 592 values for LOANS AND LEASES IN BANK CREDIT, FOREIGN-RELATED INSTITUTIONS from 1973-01-01 to 2022-04-01
Parsing https://fred.stlouisfed.org/series/LLBFRIM027SBOG| name | value |
|---|---|
| FRED Symbol | LLBFRIM027SBOG |
| FRED Series | LOANS AND LEASES IN BANK CREDIT, FOREIGN-RELATED INSTITUTIONS |
| Series Value | BILLIONS OF U.S. DOLLARS |
| Source | BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (US) |
| Reporting Frequency | MONTHLY |
| Date Updated | 2022-04-01 |
| Data Initial | 1973-01-01 |
| Date Most Recent | 2022-04-01 |
| Date Peak | 2020-04-01 |
| Date Trough | 1973-01-01 |
| Release Name | NA |
| name | value |
|---|---|
| Index IRR | 9.93% |
| Index Ratio | 105.71 |
| Observations | 592 |
| Initial Value | $8.53 |
| Most Recent Value | $901.30 |
| Change in Value | $892.78 |
| Peak Value | $941.13 |
| Trough Value | $8.53 |
| Ratio to Peak | 0.96 |
| Ratio over Trough | 105.71 |
This time series maintained by the Fed explores the illiquid portion of regulated banks balance sheets.
The Fed requires monitored banks to separate the bank credit portion of their balance sheet into two parts “Securities in bank credit” and “Loans and leases in bank credit”.
Securities in bank credit cover anything with a CUSIP common examples include US Treasuries, MBS and Agency Bonds.
Loans and leases are a much broader category of mostly illiquid secured loans.
The Fed specifies that banks report the Loans and leases in bank credit portion of their balance sheet as follows:
It comes as no surprise to anyone in the market 2004-2008 that loans by foreign entities soared in the US before the Crisis. Europe was dead and already “over-lent’ so they sought greener pastures in the US, which they had largely ignored exist for existing customers over the previous 15 years. And the flood gates open with loans more than doubling in 5 years. Sound a bit excessive?
As these foreign lenders struggled, particularly in Europe post 2008, they retrenched, rolling over only the highest quality loans. After 5 years of retrenchment they have risen by 40% in 5 years, largely driven by Chinese lenders. As the China government pressed financial institutions to “pull back”, foreign loans had gone flat, with a slight pickup out of European sources offsetting a pullback by Chinese lenders. However, in real terms today’s loan balance by foreign lenders is below the pre-Crisis peak.
At the end of the day, major foreign financial institutions should have a footprint in the US as it is the largest and most transparent market in the world. It is the speed of expansion rather than their presence that can create excessive capital flows.
Since the end of World War 2 capital markets have become increasingly globalized.
The United States has benefited this more than any country in the world as the center of global finance, the country that controls the world’s reserve currency the main beneficiary of foreign capital flows.
The as the data demonstrates the amount of foreign capital has grown exponentially since 1970 and has been essentially uneffected by 6 U.S. recessions
Although there was a sharp post brief Lehman decline, foreign capital started to return to the United States in 2010 so much so that foreign balance sheets hit an all-time high in November 2016.
This post 2010 flood of foreign capital has had serious effects on the two sectors that comprise nearly all of the illiquid portion of foreign balance sheets, Commercial Real Estate and Commercial & Industrial Loans.
This new foreign capital contributed to the record tight spreads seen in both sectors, not coincidentally, towards the end of 2016.
Going forward it will be interesting to see if this strong linear trend of significant new foreign bank capital in the United States can continue or if we have hit an inflection point and foreign balance sheets will stabilize where they or are or possibly shrink.
It is also unclear what may happen if global geo-political tensions rise. Geo-political risk is significantly leveraged by how much it may pit the United States against China given how much of the new foreign capital that’s entered the United States over the last 20 years has originated from China directly or countries in its sphere of influence.
My parting thought is this:
Many people got bailed out and hit grand-slams on leveraged investments as a direct, or indirect consequence of record levels of capital chasing certain types of commercial real estate deals and corporate loans. New foreign capital aggressively chasing marquee deals and a US presence was like adding lighter fuel to an already hot fire on a charcoal grill.
If you benefited from this phenomena recognize it for what it is, luck trumping skill.
In your underwriting going forward don’t assume foreign capital is endless and will only come to the United States to fund marquee commercial real estate and LBO deals.
Be conservative on the assumptions for financing assumptions and leave an extra cushion for the possible effects of the “known-unknowns” that could have dramatic effects like an escalated conflict between the West and Iran or one of the many possible risks that could pit the United States against China.
@online{bresler2018,
author = {Bresler, Alex and Bresler, Alex},
title = {Swimming in a {Sea} of {Foreign} {Capital}},
date = {2018-05-16},
url = {https://basedmusings.com/posts/2018-05-10-pl-test/},
langid = {en},
abstract = {Porting Linneman Post from blogdown to quarto}
}