TFAC Corporate Credit Review: Background to … Credit Review...TRADE FINANCE ADVISORY COUNCIL TFAC...

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TRADE FINANCE ADVISORY COUNCIL

TFAC Corporate Credit Review: Background to Solutions for Limited Economic GrowthSeptember 2017


2

Agenda

1. TFAC Background

2. Summary of Economic Challenges and Potential Solutions

3. Economic Growth

4. Corporate Role

5. SME Economic Importance

6. SME Credit Gap


3

Agenda

1. TFAC Background2. Summary of Economic Challenges and Potential Solutions

3. Economic Growth

4. Corporate Role


6. SME Credit Gap


TFAC Mission Statement

• The U.S. Department of Commerce Trade Finance Advisory Council (TFAC) is established in accordance with the provisions of the Federal Advisory Committee Act, as amended, 5 U.S.C. App., to advise the Secretary on matters relating to private sector trade financing for U.S. exporters. The TFAC shall advise the Secretary in identifying effective ways to help expand access to finance for U.S. exporters, especially small- and medium-sized enterprises (SMEs), and their foreign buyers.

• The TFAC shall provide a necessary forum to facilitate the discussion between a diverse group of stakeholders such as banks, non-bank financial institutions, other trade finance related organizations, and exporters to gain a better understanding regarding current challenges facing U.S. exporters in accessing finance. The TFAC shall draw upon the experience of its members in order to obtain ideas and suggestions for innovative solutions to these challenges. The TFAC shall develop recommendations on programs or activities that the Department of Commerce could incorporate as part of its export promotion and trade finance education efforts.

• The TFAC shall report to the Secretary on its activities and recommendations. In creating its reports, the TFAC should: (1) Evaluate current credit conditions and specific financing challenges faced by U.S. exporters, especially SMEs, and their foreign buyers, (2) examine other noteworthy issues raised by stakeholders represented by the membership, (3) identify emerging financing sources that would address these gaps, and (4) recommend specific activities by which these recommendations could be incorporated and implemented.

4


5

• Size credit gap

• Evaluate whether credit gap can be categorized by credit use, size of corporation, and/or by type of credit

• Develop recommendations that can have direct and/or indirect impacts on credit gap

• Develop recommendations that may have future impacts

Working Group Objectives


6

Agenda

1. TFAC Background


3. Economic Growth

4. Corporate Role


6. SME Credit Gap

TRADE FINANCE ADVISORY COUNCIL Key economic drivers are struggling to grow without necessary access to credit.

7

• Small and medium sized business (SME) have limited credit access, contributing to constrained economic growth1. Changes in bank and money market fund regulation has reduced bank financed credit access for those

businesses without access to the bond market

a. Banks deleveraging and holding more cash and high quality securities as assetsb. Banks dissuaded from wholesale funding, increasing need for bank-to-bank lending, which further crowds out

corporate borrowers2. Tax policy creates incentives, for those able to, to leave money offshore in lower taxed jurisdictions to increase

earnings, issue debt, and buyback stock

3. Significant cash build up has occurreda. Corporations have trapped “tax” dollar based cash offshoreb. Banks needing to hold more liquid assets and cashc. Low productive use of cash by banks left on Central bank balance sheet

• Absent significant changes, the “new normal” will remain constrained.- Increasing SME credit will drive growth and can be achieved through:- Modest changes to tax policy and bank regulation- Private sector incentives for credit provision

- Consider policies that:- Incentivize creation of investors and investment managers to provide credit to small businesses

Summary: SME Credit Access


0.30%

0.35%

0.40%

0.45%

0.50%

0.55%

0.60%

0.65%

0.70%

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

$ millions Impact on GDP

Estimated GDP Impact (rha) C&I Lending

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

$ millions$ millions Stimulus credit impacts

C&I Increase amnesty (rha) C&I Lending

Corporate bonds outstanding

8

Impact of Increasing SME LendingAn illustrative model of the potential impact of increased SME lending.

Source: Federal Reserve, SIFMA, estimates


9

Agenda

1. TFAC Background


3. Economic Growth 4. Corporate Role


6. SME Credit Gap


• GDP growth is limited

• Corporations are sitting on record levels of cash and profits and could do more to free up capital for other businesses

• Meanwhile, key economic drivers, SMEs, are struggling to get access to credit necessary for growth- A combination of monetary policy, tax

policy, and financial re-regulation limit access to credit

• Increasing GDP growth is important to the recovery

• Key to increasing economic growth is closing SME credit gap

• Consider proposals that enable SME credit growth

10

Broader Context of Specific Challenges in Greater Economy


• Low interest rates make small business loans unattractive to lenders

• Easier for large corporations to issue debt (bond market)

11

SME’s Left Out of Global Credit Expansion

Source: IMF; World Economic Outlook; OECD; Economic Outlook; national data; BIS calculations


• SME credit gap is over $1T, limiting the growth of important drivers of the economy

• Causes of credit gap pro-cyclically related to monetary policy, tax policy, and financial re-regulation

12

Large Non Bond Credit GapSMEs are struggling to access credit.

Source: Federal Reserve Analysis

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

$ m

illion

s

H8 C&I lending assumed constant ratio to residual value

C&I loans at constant value of residual value

Commercial and industrial loans (bank asset)

TRADE FINANCE ADVISORY COUNCIL Debt has been increasing and GDP growth has been stagnant while rate declining.

13

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP growth & Treasury, Federal Agency and corporate debt issuance1997 – 2016

Treasury Corporate Debt Federal Agency Securities* GDP Growth Rate

Limited Economic Growth

Source: Federal Reserve, SIFMA

$, Billions


14

Agenda

1. TFAC Background


3. Economic Growth

4. Corporate Role5. SME Economic Importance

6. SME Credit Gap


15

Corporate Profit GrowthDespite limited economic growth, corporations’ profits have not been stifled.

Source: BIS, National Sources


16

Record High Corporate Cash HoldingsBreakdown by industry sector.

Source: Moody's; Chart: Chris Canipe / Axios


17

Corporate Cash Levels Steadily IncreasingGlobal cash growth is >$60 Billion per quarter.

Source: European Central Bank, Treasury Strategies

TRADE FINANCE ADVISORY COUNCIL Large public companies have stock buyback incentive particularly with low GDP growth.

18

Stock Buybacks

Source: Goldman Sachs for stock repurchases analysis

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0

50

100

150

200

250

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

Perc

ent

$ bi

llions

Stock repurchases and GDP

Repurchases (lha) Repurchases / GDP (rha)


• This is just one example of public information provided by public companies about overseas cash holdings

• “[W]e have not made a US tax provision on approximately $86.0 billion of unremitted earnings of our international subsidiaries”

19

Overseas CashCorporations also have an incentive to leave lower-taxed earnings as cash overseas.

Source: Pfizer, Annual Report


20

Procyclical Impact of Cash Building in the Financial SystemCash relative to GDP is growing at record pace.

Source: Bank of England, Treasury Strategies


21

Agenda

1. TFAC Background


3. Economic Growth

4. Corporate Role

5. SME Economic ImportanceSMEs are key economic drivers but their growth has been limited.

6. SME Credit Gap


22

SME EmploymentSMEs are large drivers of employment

Source: U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Business and NonemployerStatistics Analysis

44%

46%

48%

50%

52%

54%

56%

% of private sector employees at firms with less than 500 employees

0

20

40

60

80

100

120

140

Num

ber o

f Firm

s (th

ousa

nds)

Number of Employees

Employment by firm size

0-4 5-9 10-19 20-99 100-499 500+


• The 1998-2001 trendline is slightly higher due to a change in methodology

• SMEs were hit particularly hard by the recession and did not have the same recovery resources as large corporations

23

SMEs Drive GDP Growth

Source: SBA

Note that y-axis is share of GDP

TRADE FINANCE ADVISORY COUNCIL Low growth impacts labor and wage growth.

24

0

20

40

60

80

100

120

140

160

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1975 1978 1980 1983 1986 1988 1991 1994 1997 1999 2002 2005 2008 2010 2013 2016

Percent$

billio

ns

Stock market and labor compensation growth relative to GDP

Real GDP ($B)

Gross Domestic Income ($B)

Stock Market Cap to US GDP (%)

US Labour Compensation to US GDP (%)

SME Growth is Limited

Source: Federal Reserve, analysis

TRADE FINANCE ADVISORY COUNCIL The trend holds especially true for SMEs.

25

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

20142013201220112010200920082007200620052004200320022001200019991998199719961995199419931992199119901989

Per capita annual payroll growth rate by firm size

< 500 Employees 500+ Employees Linear (< 500 Employees) Linear (500+ Employees)

Payroll Growth Slowing

Source: U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Business and NonemployerStatistics Analysis


• Individuals and small businesses fund the bulk of Federal revenue

• Low wage and job growth limits tax revenue and tax revenue growth

• Thus, low growth is ultimately pro-cyclical

• Increasing SME growth will increase jobs, wages, and revenue, which will increase overall economic growth

26

SMEs and the Tax BurdenSMEs are an important source of revenue.

Source: OMB

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue source by type of tax1967 - 2016

IndividualIncome Taxes

Payroll Taxes CorporateIncome Taxes

Excise Taxes Estate andGift Taxes

Customs Duties

Miscellaneous Receipts


27

Agenda

1. TFAC Background


3. Economic Growth

4. Corporate Role


6. SME Credit GapSMEs have limited access to credit.


28

Global Credit Expansion

Source: BIS International banking and financial market developments March 2017

TRADE FINANCE ADVISORY COUNCIL Loans declining as banks adjust balance sheet to regulation and monetary policy.

29

Declines in Small Business Loans

Source: Jeremey Stein, NBER


30

Bank Re-Regulation Limiting SME Credit Growth

Source: BIS


31

Central Bank Asset and Reserve GrowthGrowth led by re-regulation and monetary policy.

Source: BIS, Federal Reserve, Treasury Strategies


Crowding Out

32

Real money investors are being crowded out by Fed bond buying policies.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Federal Reserve ratesIOEREffective Federal funds rateON-RRP Rate Lending to Money

Market Funds

$-

$500,000,000,000

$1,000,000,000,000

$1,500,000,000,000

$2,000,000,000,000

$2,500,000,000,000

$3,000,000,000,000

$3,500,000,000,000

$4,000,000,000,000

$4,500,000,000,000

NO

V-17

M

AR-1

8 JU

L-18

N

OV-

18

MAR

-19

JUL-

19

NO

V-19

M

AR-2

0 JU

L-20

N

OV-

20

MAR

-21

JUL-

21

NO

V-21

M

AR-2

2 JU

L-22

N

OV-

22

MAR

-23

JUL-

23

NO

V-23

M

AR-2

4 JU

L-24

N

OV-

24

MAR

-25

JUL-

25

SOMA run-off schedule assuming 11/30/17 implementation

Treasury securitiesAgency debt and MBS

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

$ bi

llions

Federal Reserve SOMA total holdings


33

• GDP growth is limited

• Corporations are sitting on record levels of cash and profits and could do more to free up capital for other businesses

• Meanwhile, key economic drivers, SMEs, are struggling to get access to credit necessary for growth

- A combination of monetary policy, tax policy, and financial re-regulation limit access to credit

• Increasing GDP growth is important to the recovery

• Key to increasing economic growth is closing SME credit gap- Increasing SME growth will drive GDP growth

• Consider proposals that enable SME credit growth

Conclusion

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TFAC Corporate Credit Review: Background to … Credit Review...TRADE FINANCE ADVISORY COUNCIL TFAC...

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