Shadow Banking

Slowdown in Shadow Lending Tightens Credit on Main Street

America’s shadow banking system slowed sharply through the end of June, with the value of bonds backed by personal, corporate and real-estate loans falling $98 billion from the first half of 2015.

That drop, which excludes bonds from state-backed issuers like Fannie Mae, represents a 37% decline from a year earlier, according to industry newsletter Asset-Backed Alert, and is making it harder for businesses, shopping-mall owners and consumers to refinance their debt.

The pullback was triggered by the investor flight from riskier types of bonds around the New Year and persisted even as broader market conditions improved. One contributing factor is a regulation that will require producers to hold some of the securities they create, a requirement that makes the business less profitable and has slowed the packaging of new loans into bonds. Another is uncertainty raised by Britain’s vote to leave the European Union.

The resulting drop-off in issuance is roughly equal to the volume of loans that Fifth Third Bancorp, one of the country’s largest regional banks, has on its balance sheet, according to data provider SNL Financial. It represents another weight on an economy already notable for weak business investment.

The drop-off is particularly acute in the market for commercial mortgage-backed securities. At $31 billion so far this year, CMBS issuance is down nearly 44% from the same period in 2015. Thousands of real-estate owners who tapped the market during the boom years of 2006 and 2007 need to refinance their maturing debts this year and next. Many will have to find alternative sources of funds, said Paul Fitzsimmons, head of CMBS research at Kroll Bond Rating Agency.

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