Better lending methods the solution to
turmoil

Historians may claim that August 8 2007, when banks stopped
lending to each other, followed in the UK by the unseemly queues
outside branches of the Northern Rock Bank in mid-September,
represented the end of ‘cheap and easy money’. Just how many of
those worried investors understand how or what are the reasons for
the panic in which they are participating is open to
question. 

Does anybody really understand the metrics of this new – or
possibly recycled phenomenon? Is it a hiccup in liquidity, the
start of a new Wall Street Crash – or something more
significant? 

Whatever are the answers to these questions, leasing is fairly
well positioned to cope with the impact.The very basis of leasing
is that it is asset-based so, at least from that viewpoint, it is
likely to continue largely unscathed, provided prudence rules. One
consequence of the short term credit crunch may well be the
ultimate provision of that credit. 

So what are the long-term risks and changes one might anticipate
for industrial and business finance? My immediate list would
include the following: 

• Balanced portfolios: Banks are likely to rebuild strategically
sustainable portfolios with much tighter internal and external
control of special investment vehicles (SIVs).That in turn may lead
to a reduction in the rate of growth of credit. 

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• Risk management for both borrower and lender. This will be
returned to a seat at the very top table as potential capital
providers will only accept the best quality propositions. But how
might that impact on equipment in terms of availability? 

• Lending quality. Some of the more exotic SIVs developed to
maximise credit creation may well go out of fashion – ‘quality’ and
‘asset backing’ will rise to the top of the financial lexicon
again. How might capital goods securitisation fit into this revised
focus? 

• Liquidity: Financial institutions will seek to rebuild
balances and portfolios; money will be lent only for the best
security (although at the time of writing, interbank lending is
reputedly already building up again). Some analysts reckon banks
globally may have to write down as much as $30bn of their $300bn
debts. 

• Interest rates:These have already increased and may be needed
to flush the liquidity back into the money markets. Overnight
interbank rates and three month rates have returned to the margins
of 2005.That could be the first sign of a return to interest rate
normality. 

However, as hedge funds seek to rebalance their portfolios and
exposure, pension funds, central banks, middleeastern and Russian
players are taking advantage of these rates.We may see some
interesting changes in ownership as a result. 

A conclusion? Difficult. Leasing is a prudent business with a
set of tried and tested guidelines.The challenge now is for all
players to look to do business within the rules – and perhaps pay
more attention to the sources of credit as much as to the
applications of that credit and the associated risk
management. 

The author is professor of automotive management at the
University of Buckingham