Fed: Banks Easing Up on Credit to Hedge Funds

The Federal Reserve has observed that Wall Street’s big banks eased credit terms for hedge funds and private equity firms in the 4th quarter of 2010.   More banks believe that credit terms have “eased somewhat” than those that think it has “tightened somewhat” in the last three months of 2010, according to the Fed’s year-end financing survey.  Hedge funds and other investors worked harder to negotiate favorable terms for transactions; 55 percent of dealers responded that clients “increased somewhat” or “increased considerably” their requests for concessions.

According to the Fed, increased competition and general improvement in the market are the primary reasons that explain why the terms eased.  Fully 90 percent of survey respondents cited each factor as “very important” or “somewhat important” in easing their terms.  The Fed, which started the survey in response to the financial crisis, found that the results “highlighted that a significant volume of credit intermediation has moved outside of the traditional banking sector.”

“More-aggressive competition from other institutions and an improvement in the current or expected financial strength of counterparties were frequently cited reasons for the easing of terms,” the Fed report said.   In addition, the banks surveyed said borrowers have increased efforts to negotiate better terms.  “Dealers also noted that demand for funding of all categories of securities covered in the survey had increased over the past three months, including demand for funding of equities,” the report said.