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Interest rates and the credit expansion
submited on 16.12.2009 in category Political stability | Fiscal affairs | Monetary policy | Macroeconomic developments
In the banking system there is an ongoing process of substituting the limited access to external financing with domestic lending resource, which reasonably led to increasing costs of financial institutions to attract funds from residents. From time to time there are new suggestions for government intervention on the loanable funds’ market to artificially depress the cost of the lending resource. Suggestions vary from depositing part of the fiscal reserve in commercial banks to limiting the government guarantee only to lower-yield deposits.
Apart from all damaging effects, related to price control of the financial resource, such suggestions are based on the wrong assumption, that the recent deceleration of credit expansion is attributable solely to the relatively high cost of credit. The Bulgarian banking system knows periods of rapid credit expansion under similar (or even higher) interest rates. Even if interest rates on loans are artificially lowered this will hardly reflect in very fast expansion of credit. The deceleration of credit expansion, particularly notable in the last year, is due to raising not only the price criteria in the form of higher interest rates, but also non-price criteria (requirements for equity participation, proven stability of household income, increased requirements regarding financial indicators of business).
Banks’ conservative approach is completely rational in a state of increasing uncertainty regarding employment, income and unclear perspectives before the local companies. Certainly, the non-market decrease of interest rates would result in certain reduction of interest rates on deposits and the already extended corporate loans, which is in essence a direct transfer of wealth from savers (mainly households) to borrowers (individual and corporate).
submited on 16.12.2009 in category Political stability | Fiscal affairs | Monetary policy | Macroeconomic developments
In the banking system there is an ongoing process of substituting the limited access to external financing with domestic lending resource, which reasonably led to increasing costs of financial institutions to attract funds from residents. From time to time there are new suggestions for government intervention on the loanable funds’ market to artificially depress the cost of the lending resource. Suggestions vary from depositing part of the fiscal reserve in commercial banks to limiting the government guarantee only to lower-yield deposits.
Apart from all damaging effects, related to price control of the financial resource, such suggestions are based on the wrong assumption, that the recent deceleration of credit expansion is attributable solely to the relatively high cost of credit. The Bulgarian banking system knows periods of rapid credit expansion under similar (or even higher) interest rates. Even if interest rates on loans are artificially lowered this will hardly reflect in very fast expansion of credit. The deceleration of credit expansion, particularly notable in the last year, is due to raising not only the price criteria in the form of higher interest rates, but also non-price criteria (requirements for equity participation, proven stability of household income, increased requirements regarding financial indicators of business).
Banks’ conservative approach is completely rational in a state of increasing uncertainty regarding employment, income and unclear perspectives before the local companies. Certainly, the non-market decrease of interest rates would result in certain reduction of interest rates on deposits and the already extended corporate loans, which is in essence a direct transfer of wealth from savers (mainly households) to borrowers (individual and corporate).
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