This chapter discusses finance companies Activities of finance companies
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This chapter discusses finance companies Activities of finance companies Competitive environment Size, structure, and composition Regulation Global issues Finance companies originated during the Great Depression Installment credit General Electric Capital Corporation Competition from banks increased during 1950s Expansion of product lines Controversial approval by the Fed of GMAC as a bank holding company Allowed access to $6 billion in government bailout money Fed required GM to reduce its holdings in GMAC to less than10 percent, from 49 percent Activities similar to banks, but no depository function May specialize in installment loans (e.g. automobile loans) or may be diversified, providing consumer loans and financing to corporations, especially through factoring Commercial paper is key source of funds Finance Companies (continued) Captive Finance Companies: e.g., Ford Motor Credit Corp. Highly concentrated Largest 20 firms: 65 percent of assets Sales finance institutions: Ford Motor Credit and Sears Roebuck Acceptance Corp. Personal credit institutions: HSBC Finance and AIG American General Business credit institutions: CIT Group and U.S. Bancorp Equipment Finance Equipment leasing and factoring For information on finance companies, visit: GE www.ge.com GMAC www.gmacfs.com www.ally.com Ford Credit www.fordcredit.com HSBC www.us.hsbc.com Citigroup www.citigroup.com Largest Finance Companies Business and consumer loans are the major assets 58.0% of total assets, 2012 Reduced from 95.1% in 1977 Increases in real estate loans and other assets Growth in leasing and business lending Finance companies face credit risk, interest rate risk, and liquidity risk Consumer loans Primarily motor vehicle loans and leases Historically charged higher rates than commercial banks Low auto finance company rates Following 9/11 attacks Attempts to boost new vehicle sales via 0.0% loans lasted into 2005 By 2002, rates were 3.3% lower than banks on new vehicles Consumer Loans (continued) Generally riskier customers than banks “Loan shark” firms with rates as high as 30% or more Payday loans 390 percent APR Regulated by states As of 2012, payday loans effectively banned in 18 states Controlled in other states via usury limits Evaded by forming relationships with nationally chartered banks, based in states that do not have usury limits (e.g., South Dakota, Delaware) Mortgages have become a major component of finance company assets May be direct mortgages, or as securitized mortgage assets Growth in home equity loans following passage of Tax Reform Act of 1986 Tax deductibility issue Defaults in subprime and even relatively strong credit mortgages in 2007-2008 Root cause of the financial crisis in 2008-2009 For information on home equity loans, visit: Consumer Bankers Association www.cbanet.org Business loans comprise largest portion of finance company loans (~30%) Advantages over commercial banks: Fewer regulatory impediments to types of products and services Not depository institutions hence less regulatory scrutiny and lower overheads Often have substantial expertise and greater willingness to accept riskier clients Major subcategories: Retail and wholesale motor vehicle loans and leases Equipment loans Tax and other associated advantages when finance company leases the equipment directly to the customer Other business loans and securitized business assets Major liabilities: Commercial paper and other debt (longer-term notes and bonds) Finance firms are largest issuers of commercial paper (frequently through direct sale programs) Management of liquidity risk differs from commercial banks Strong loan demand and solid profits for the largest firms in the early 2000s Effects of low interest rates Not surprisingly, the most successful became takeover targets Citigroup/Associates First Capital AIG/American General HSBC Holdings/Household International Mid 2000s problems arose 2005, 2006: falling home prices and rising interest rates Sharp pullback from subprime mortgage lending End of 2009: National all time high for mortgage delinquencies 6.89% Countrywide Financial and CIT Group failure Regulation of Finance Companies Federal Reserve’s definition of finance company A firm, other than a depository institution, whose primary assets are loans to individuals and businesses Subject to state-imposed usury ceilings Lower regulatory burden than DIs Not subject to Community Reinvestment Act of 1977 Impact of nonbank FIs, including finance companies, on the U.S. economy resulted in greater scrutiny Fed rescue of several finance companies was a factor 2010 Wall Street Reform and Consumer Protection Act Regulation of Finance Companies With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds Lower leverage than banks (14.3% capital-assets versus 11.5% for commercial banks in 2012) Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit In foreign countries, finance companies are generally subsidiaries of commercial banks or industrials Importance of nonbank FIs has been increasing over the past decade Latin America and Europe New Zealand: consolidation, collapse, and restructuring of finance companies American General Federal Reserve Citigroup Consumer Bankers Association Ford Motor Credit General Electric Capital Corp. General Motors Acceptance Corp. HSBC Finance www.aigag.com www.federalreserve.gov www.citigroup.com www.cbanet.org www.fordcredit.com www.gecapital.com www.gmacfs.com www.us.hsbc.com Do'stlaringiz bilan baham:
