6-1 Finance Companies Chapter 6
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6-1 Finance Companies Chapter 6






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6-1 Finance Companies Chapter 6 6-1 Finance Companies Chapter 6 Presentation Transcript

  • Historical Perspective
    • Finance companies originated during the depression.
      • Installment credit
      • General Electric Capital Corporation.
      • Competition from banks increased during 1950s.
    • Expansion of product lines
      • GMACCM is one of the largest commercial mortgage lenders in U.S.
  • Finance Companies
    • 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.
    • Captive Finance Companies: e.g. GMAC
    • Highly concentrated
      • Largest 20 firms: 65 percent of assets
  • Major Types of Finance Companies
    • 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 FleetBoston Financial.
      • Equipment leasing and factoring
        • Key Bank locally
  • https://www.hfc.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext_sot=Self-Directed&WT_seg_1=Prospect http://www.hsh.com/not-the-associates.html https://www.beneficial.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext_sot=Self-Directed&WT_seg_1=Prospect http://www.kefonline.com/ http://www.docshop.com/education/vision/refractive/lasik/financing/
  • Largest Finance Companies
  • Balance Sheet and Trends
    • Business and consumer loans are the major assets
      • 52.8% of total assets, 2006.
      • Reduced from 95.1% in 1977.
    • Increases in real estate loans and other assets.
    • Growth in leasing
    • Finance companies face credit risk, interest rate risk and liquidity risk.
  • Balance Sheet and Trends
    • Consumer loans
      • Primarily motor vehicle loans and leases.
      • Anomalous low auto finance company rates are anomalous following 9/11 attacks.
        • Attempts to boost new vehicle sales via 0.0% loans lasted into 2005.
        • By 2003, rates 3.5% lower than banks on new vehicle rates
  • Consumer loans (continued)
    • Generally riskier customers than banks serve.
      • Subprime mortgage lenders
      • Jayhawk Acceptance Corp.
        • From auto loans to tummy tucks and nose jobs
    • Increase in “loan shark” firms with rates as high as 30% or more.
    • Payday loans
      • 390 percent APR (Implication for EAR is staggering!)
  • Balance Sheet and Trends
    • Mortgages
      • Recent addition to finance company assets
      • Smaller regulatory burden than banks
      • May be direct mortgages, or as securitized mortgage assets.
      • Growth in home equity loans since passage of Tax Reform Act of 1986.
        • Tax deductibility issue.
        • Conversion of credit card debt
        • 2006 average home equity loan $82,872
        • Defaults in subprime and relatively strong credit mortgages in 2007
  • Business Loans
    • Business loans comprise largest portion of finance company loans.
    • 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.
  • Business Loans
    • Major subcategories:
      • Retail and wholesale motor vehicle loans and leases
      • Equipment loans
        • tax issues and other associated advantages when finance company leases the equipment directly to the customer
      • Other business loans and securitized business assets
  • Liabilities
    • 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).
      • Commercial paper maturities up to 270 days.
    • Consequently, management of liquidity risk differs from commercial banks relying on deposits
  • Industry Performance
    • 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,
      • Household International/HSBC Holdings
    • Mid 2000s problems arose
      • 2005, 2006: falling home prices and rising interest rates
      • Pullback from subprime loans
  • Regulation of Finance Companies
    • Federal Reserve definition of Finance Company
      • Firm, other than depository institution, whose primary assets are loans to individuals and businesses.
    • Subject to state-imposed usury ceilings.
    • Much lower regulatory burden than depository institutions.
      • Not subject to Community Reinvestment Act.
      • Lack the banks’ regulatory safety-net
  • Regulation
    • With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds.
    • Lower leverage than banks (11.4% capital-assets versus 10.36% for commercial banks in 2006).
    • Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit.
  • Global Issues
    • In foreign countries, Finance companies are generally subsidiaries of commercial banks or industrials
    • In Japan, ownership of finance companies by banks created opportunities when banks hit by increase in nonperforming loans
      • GE Capital/Japan Leasing Corporation
  • Pertinent Websites
    • American General www.aigag.com
    • Federal Reserve www.federalreserve.gov
    • Citigroup www.citigroup.com
    • Consumer Bankers Association www.cbanet.org
    • Ford Motor Credit www.fordcredit.com
    • General Electric Capital Corp. www.gecapital.com
    • General Motors Acceptance Corp. www.gmacfs.com
    • HSBC Finance www.hfc.com
    • Household International www.household.com