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If banks shorten the term duration on line of credit for companies, does that mean banks are weak?
WSJ
1. Banks want to shorter term for line of credit for companies as less than one year.
2. Banks will charge more if the cost of insuring the company against default rises. CDS spreads will be used to measure cost of insuring.
3. Banks claim that the shorter term for line of credit will help them determine risk.
4. Companies that are forced to use line of credit are stressed.
1. Banks want to shorter term for line of credit for companies as less than one year.
2. Banks will charge more if the cost of insuring the company against default rises. CDS spreads will be used to measure cost of insuring.
3. Banks claim that the shorter term for line of credit will help them determine risk.
4. Companies that are forced to use line of credit are stressed.
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No, it means they are risk-averse.
The longer a line of credit is active, the more likely something bad will ( may, can, might ) happen to the borrower, or the borrower's customers, or the economy in general.
A line of credit is a binding commitment on the bank. If the borrower meets the requirements, the bank is obligated to perform. The longer the commitment is active, the more risk the bank is taking. They are being vilified every day for taking too much risk. It would be surprising if they were not taking steps to reduce risk.
The other side of the coin is that something bad could happen to the bank that might make them unable to fund the committed amount. They could lose deposits. The Fed could reduce their credit line, the treasury could recall their TARP funds. A totally unrelated borrower could go broke and result in a loss that would reduce the bank's capital to a level that would prevent them from funding.
Long term commitments of any kind require businesses to be able to plan. In this environment, they simply cannot do that. In addition to the uncertainties about the economy, the current administration is changing the rules almost daily. Business men cannot enter a binding contract of any kind if they fear the government will change the rules on them before it can be completed.
Note. This does not mean that they are not weak. Weak and strong businesses must be able to plan to be sure they can perform on their commitments.
The longer a line of credit is active, the more likely something bad will ( may, can, might ) happen to the borrower, or the borrower's customers, or the economy in general.
A line of credit is a binding commitment on the bank. If the borrower meets the requirements, the bank is obligated to perform. The longer the commitment is active, the more risk the bank is taking. They are being vilified every day for taking too much risk. It would be surprising if they were not taking steps to reduce risk.
The other side of the coin is that something bad could happen to the bank that might make them unable to fund the committed amount. They could lose deposits. The Fed could reduce their credit line, the treasury could recall their TARP funds. A totally unrelated borrower could go broke and result in a loss that would reduce the bank's capital to a level that would prevent them from funding.
Long term commitments of any kind require businesses to be able to plan. In this environment, they simply cannot do that. In addition to the uncertainties about the economy, the current administration is changing the rules almost daily. Business men cannot enter a binding contract of any kind if they fear the government will change the rules on them before it can be completed.
Note. This does not mean that they are not weak. Weak and strong businesses must be able to plan to be sure they can perform on their commitments.
source(s):
Personal experience.
Personal experience.
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I think TCE is the number to watch. My intrepretation of TCE is that the banks are weak and their policies reflect that weakness.
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Banks are underfunded against lose (TCE). In 2000, (TCE was twice the value), meaning banks were healthier and more capable of withstand risk. Extending line of credit for term allow banks to collect more interest and fees without fearing default.