- Political stability
- Fiscal affairs
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Effects of BNB credit restrictions one year later
submited on 11.09.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 11.09.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Exactly one year ago BNB decided to raise minimal required reserves to 12% of the deposit base, with the aim being to reduce the probability of overheating. The foundation of this decision is the rationale that the rapid credit expansion leads increasing inflationary pressure and expanding current account deficit. In the state of currency board regulating the minimal required reserves id the only monetary tool, which the BNB can actually use. In the same time, the level of the MRR is six times higher in Bulgaria, compared to the Euro area.
The decision to introduce new credit restrictions was taken in August 2007, when the housing crisis in the US was already a fact. One year later the effects of the credit restrictions are the following.
Raising the MRR made Bulgarian banks seek alternative ways of financing, in order to continue the active credit policy. Hence, the dependence of the banking system on external financing increased.
The more expensive financial resource reflected on business and household credit interest rates which rose.
The credit restrictions did not change the steady trend for extending the horizon of bank loans. Both the share of housing credit and the share of the long-term corporate credit increased. In 1999 for example barely 9% of the firm credit are longer-term (with maturity above 5 years) – i.e. credit back then was simply providing liquidity rather than executing some investment policy.
Credit restrictions contributed to the gradual deceleration of the credit expansion, especially in the mortgage segment. However, the credit growth would have declined even without raising the MRR, having in mind the record high cost of financing on global scale.
The necessity of restrictive monetary policy is important, considering the high budget surplus so far. The freezing of substantial financial resource (in the form of either large budget surplus or high minimal required reserves) limits the opportunities for the economy to grow, which could potentially have negative impact in the medium term.
The decision to introduce new credit restrictions was taken in August 2007, when the housing crisis in the US was already a fact. One year later the effects of the credit restrictions are the following.
Raising the MRR made Bulgarian banks seek alternative ways of financing, in order to continue the active credit policy. Hence, the dependence of the banking system on external financing increased.
The more expensive financial resource reflected on business and household credit interest rates which rose.
The credit restrictions did not change the steady trend for extending the horizon of bank loans. Both the share of housing credit and the share of the long-term corporate credit increased. In 1999 for example barely 9% of the firm credit are longer-term (with maturity above 5 years) – i.e. credit back then was simply providing liquidity rather than executing some investment policy.
Credit restrictions contributed to the gradual deceleration of the credit expansion, especially in the mortgage segment. However, the credit growth would have declined even without raising the MRR, having in mind the record high cost of financing on global scale.
The necessity of restrictive monetary policy is important, considering the high budget surplus so far. The freezing of substantial financial resource (in the form of either large budget surplus or high minimal required reserves) limits the opportunities for the economy to grow, which could potentially have negative impact in the medium term.
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