- Political stability
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- Monetary policy
- Regulated markets
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- Macroeconomic developments
The evolution of household lending
submited on 27.06.2009 in category Monetary policy | Macroeconomic developments
Furthermore, interest rates on consumer loans tend to be higher than mortgage loans’ and since mid-2007 the spread between the two expanded, as the sequence of events of the current financial crisis unfolded. Consumer loans are usually considered to be more risky since they often do not have any collateral as opposed to mortgage loans. This is even more relevant in a state of falling incomes due to shrinking employment or stagnating wages. Housing loans are collateralized which reduces the incentives of the borrower to default on their debt. Housing prices might have fallen by some 20-25% from their peak in 2008 but this effect is offset by the relatively low loan-to-value ratio in Bulgaria, at least compared to developed economies.
While gradually approaching maturity, the Bulgarian credit market will tend to resemble to some extent the structure of the household credit portfolio in the Euro area. Hence, over the long run the share of housing loans will increase at the expense of the relative weight of consumer credit. In the short term, if banks remain reluctant on lending for consumption purposes, some of the households rejected by banks will shift to alternative sources of financing such as credit institutions specializing in sub-prime lending (i.e. “fast loans”). In result, portion of the credit risk will be transferred outside the banking system into the balance sheets’ of the corporations specializing in lending to households. Thus, monitoring the development of the non-bank credit institutions’ portfolio can serve as a good proxy for diagnosing the true household financial health.
submited on 27.06.2009 in category Monetary policy | Macroeconomic developments
Furthermore, interest rates on consumer loans tend to be higher than mortgage loans’ and since mid-2007 the spread between the two expanded, as the sequence of events of the current financial crisis unfolded. Consumer loans are usually considered to be more risky since they often do not have any collateral as opposed to mortgage loans. This is even more relevant in a state of falling incomes due to shrinking employment or stagnating wages. Housing loans are collateralized which reduces the incentives of the borrower to default on their debt. Housing prices might have fallen by some 20-25% from their peak in 2008 but this effect is offset by the relatively low loan-to-value ratio in Bulgaria, at least compared to developed economies.
While gradually approaching maturity, the Bulgarian credit market will tend to resemble to some extent the structure of the household credit portfolio in the Euro area. Hence, over the long run the share of housing loans will increase at the expense of the relative weight of consumer credit. In the short term, if banks remain reluctant on lending for consumption purposes, some of the households rejected by banks will shift to alternative sources of financing such as credit institutions specializing in sub-prime lending (i.e. “fast loans”). In result, portion of the credit risk will be transferred outside the banking system into the balance sheets’ of the corporations specializing in lending to households. Thus, monitoring the development of the non-bank credit institutions’ portfolio can serve as a good proxy for diagnosing the true household financial health.
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