Uh-oh. It may be that the Great Credit Crunch has not yet arrived. Witness this chart dug up by Sempra Metals’ John Kemp:
Apologies for the slightly poor legibility, but this illustrates the average daily volume of cash and securities transfers across Fedwire, the real-time gross settlement system operated by the Fed for transfers between commercial banks and other major financial institutions in the US.
The rising trend in financial sector activity over the past 15 years is clear, although there was a small dip after the Mexican crisis and Orange County scandal of 1994, and then bigger drops (circled above) after the Asian /Russian crises and LTCM in 1998 and again in 2001 following the bursting of the dot com bubble and 9/11.
But what is also clear is that there has been no contraction in activity since last summer!
Indeed, Fedwire funds transfers have surged rather than fallen - up 10 per cent in Q3 and then another 5.2 per cent in Q4.
Now, before we jump to the conclusion that the past crisis-racked few months have all been a bad dream, Kemp issues a word of caution:
The FEDWIRE statistics may overstate the extent to which financial activity has risen in recent months. FEDWIRE is a real-time gross settlement system operated by the Federal Reserve Banks (the most secure institutions in the current environment). It is likely that some transactions that were previously being handled directly between banks and other institutions are now being routed via through FEDWIRE instead to cut credit and settlement risks (FEDWIRE funds transfers are effectively instantaneous and become irrevocable immediately — eliminating Herstatt and other settlement risks caused when one institution receives funds and then fails before it can deliver the other leg of the transaction to its counterparty). In the current troubling environment, it is likely some transactions previously routed through other systems are now being sent via FEDWIRE to limit counterparty credit exposures.
But it now seems inaccurate for us to routinely say that banks have been unwilling to lend to one another during the Crunch, since the total volume of financial activity remains very high. Private equity and subprime securitisation may have come to a halt, but other areas like corporate loans and currency trading appear to have continued to grow regardless.
A dire warning from Kemp:
If there IS going to be a credit crunch and a substantial decline in the ratio of financial activity to real-sector activity, it is still in future. The real impact of the credit crunch on real-side business activity has yet to be felt fully and will only be manifest in H2 2008, when restrictions on credit availability and falling profits will likely translate into a downturn in business investment, employment and growth.
