Wells Fargo is tightening credit. This is commonplace in times of uncertainty. It is also one of the reasons why many feel that things will not rapidly bounce back.
We already saw an increase in the lending standards in mortgages. This instantly removes a bunch of perspective buyers from the market. It is not something that makes sellers very happy.
Now we get a report that Well Fargo sent out hundreds of cancellation letters to the automobile dealers it had credit arrangements with. No longer will the bank be accepting of applications from these dealerships.
This latest action is targeting the independent dealers. These are the ones who are not tied to the manufacturers. Essentially, this applies to the used car market.
A move of this nature is not going to help the car business. Last week Hertz filed for bankruptcy. At the same time, rival Avis is looking to unload a big portion of its fleet in an effort to defend its balance sheet. This is going to flood the used car market with vehicles.
With credit tightening, things are only going to get worse for those companies involved. Much in the same way with mortgages, when auto loans get cut, sales go down. A large percentage of car sales are via credit.
The bank is obviously worried about defaults. While this move only affects roughly 10% of the bank's dealership agreements, it is catastrophic to the dealers. They depend upon the credit to move cars from their lots. If other banks follow suit, this could freeze up the used car market through the independent channel.
Across the board credit tightening will have a tremendous impact on the economy. Many are still holding out hope that we see a V-shaped recovery. The challenge with this is the fact that the economy was so dependent upon credit for its growth. Thus, a cutback in the credit issued will negatively stunt the recovery.
Of course, in this instance, the banks can't be faulted. It is actually smart (and responsible) to tighten credit in a downturn. With so many losing their jobs, as well as millions mores on uncertain grounds, it only makes sense that the risk associated with them increases.
Since nobody knows what will result from the economic downturn, companies that are raising cash while cutting risk are going to be able to weather the storm.
Wells Fargo, after years of scandal, might actually be taking reasonable actions.
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