SLOW IN THE US
WHEN IT COMES TO bank credit extension, the United States has the opposite problem to South Africa. Private sector borrowing is growing at too slow a rate in the US, while in SA growth in bank credit extension is defying gravity. According to the International Monetary Fund, in first quarter 2008 US private sector borrowing growth fell to 5,2% – a level last seen after the 2001 recession. The IMF says with continuing pressures on banks to de-leverage that growth might slow further.
The slow growth in credit in the US is the result of the sub-prime mortgage crisis, which came about when banks extended credit to customers who weren’t creditworthy and then packaged those loans into mortgage-backed securities. As economic conditions in the US worsened, homeowners could no longer meet their mortgage repayments and banks suffered huge losses. Credit markets froze and even creditworthy clients battled to get the beleaguered banks to extend loans to them. As a result, growth in private sector borrowing fell.
The IMF puts the potential bank losses stemming from the credit crisis at a massive US$945bn in its latest Financial Stability Report Market Update. It noted that with inflation risks on the rise the scope for monetary policy to be supportive of financial stability has become more constrained. The US Federal Reserve has already slashed interest rates to just 2% in response to the sub-prime crisis and the threat of a US recession.
In SA, banks have been virtually unscathed by the sub-prime crisis. Here, the problem for banks will increasingly be bad debts.