Central-bank action is failing to stem the routUnfortunately, credit is not readily available. Funding strains have emerged across markets globally. In January American firms that issued risky high-yield debt paid around 3.5 percentage points more to issue a bond than the government did. This spread is now above 8 percentage points (see chart 3). But even if firms did want to issue bonds at such rates, they cannot. Corporate debt markets are virtually shut in America and Europe.
If bonds are unavailable, firms turn to banks.
Many have credit lines enabling them to borrow whenever they need, up to a certain limit (akin to a credit card). Last week Boeing, an aircraft manufacturer, drew down its entire $13.8bn line in order to stockpile cash.
In America, there have been reports of firms of all stripes—from chipmakers to casino and cruise operators—doing the same. In Europe Aercap Holdings, an aircraft-leasing firm, said it was drawing down its $4bn credit line.
But banks have problems of their own. The first is that the thicket of global bank regulations imposed on them since the financial crisis may be exacerbating the funding crunch. Take regulations concerning “risk-weighted assets”. Banks must hold a certain amount of capital relative to the size and riskiness of the assets, such as loans, they have on their books. But as volatility in the value of the assets rises, they become more risky, forcing banks to shrink their balance-sheets. Another example is the new Current Expected Credit Losses rule, which came into effect for public companies in January. It forces banks to provision for bad loans as the probability of default rises, rather than waiting until counterparties start missing payments before booking losses.
The second problem banks have is their own scramble for cash.
As lenders make loans, their balance-sheets grow. But balance-sheet is a scarce resource, especially in the current climate. In order to issue more loans banks must either shrink other assets, or find extra capital and funding. They are doing both. Banks have pulled back from market-making activity, as evidenced by the stubbornly high interest rates in the “repo” market, where firms and banks can swap cash overnight in exchange for posting Treasuries as collateral. Ordinarily banks might jump at the opportunity to arbitrage the difference away by hoovering up Treasuries. Yet intermediating in the repo market is something they can ill afford at present. Banks are also retaining more of their profits in order to build up capital. On March 15th America’s six largest banks announced they were halting share buybacks for three months.
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