In many countries, a strong correlation was found between the change in the economic and financial situation of enterprises and the credit policy of banks.
The research shows that there is a dependency, correlation between the change in the rate of economic growth of the country, economic and financial situation of economic entities, citizens 'incomes, enterprises' investment, investment risk, liquidity risk, debt, creditworthiness, creditworthiness of enterprises, etc. and the changing the credit policy of commercial banks that provide corporate loans and consumer loans to citizens.
However, in recent years, especially before the emergence of the global financial crisis in 2008, it was possible to diagnose a reverse correlation, i.e. that banks, mainly investment banks in low interest rates activated the entire banking sector, including primarily retail commercial banking to provide subsequent mortgage loans even for borrowers no longer possessing creditworthiness. Credit rating agencies issued the highest AAA recommendations for the loan packages sold, most of which were of low quality and low creditworthiness. Insurance companies insured transactions of very high credit risk. Acting on behalf of banks, the media published articles suggesting a good prospect of economic development, a continuation of good economic conditions, including the real estate market, a further rise in property prices. Many financial institutions, media institutions and investment firms participating in this procedure commonly used unethical business practices.
In the light of the above, the following questions arise:
How should banking procedures be improved to prevent future use of such type of unethical business practices?
How should the processes of improving bank credit risk management be carried out in commercial banks, so that more such situations will not happen again, in order to avoid this type of another global financial crisis?
How strong can be the impact of the banks' lending policy on the situation in the construction sector?
In view of the above, is this impact not too strong in periods of high economic growth, ..., in periods of too high economic growth, overinvested investment projects financed mainly by loans and overvalued securities on stock exchanges?
Please reply
Best wishes
Interesting question. Have to check at the elasticity of any studies on consruction.
This is a very interesting question. I think that, answering the question about unethical business practices, the dependency link between investment banks and commercial back a) should be banned, which would reduce the risk on the real economy, or b) let the market discipline teach the lessons from bad practices. The role of the rating agencies was very disappointing as the risk assessment of modern financial products (CDSs, CDOs, ...) made the banking system as a whole to undertake even riskier positions, affecting the overall stability of the system. Regarding the lending policies, I believe that the incentives to purchase houses led to more speculation in the sector, resulting in the also famous housing bubble.
Comparing both sides of the game, it seems to me that the lending policies were wrongly designed and let speculative investors to underestimate risk, affecting the volatility in construction activities, and showing the strong effects of specific policies in specific sectors.
Dear Colleagues and Friends from RG,
On the basis of the above considerations and conclusions from the discussion on interesting issues discussed, I formulated the following thesis that banks' lending policy regarding granting loans and para-credit instruments for enterprises operating in the construction sector and for citizens buying houses and flats may be significant for the situation in the construction sector and boom in the entire national economy, for economic growth, etc. In many countries from the beginning of the 21st century to the global financial crisis in 2008 and in subsequent years, strong correlations could be observed in this matter.
I would like to add a few words to the above discussion on interesting issues related to the importance of the banks' lending policy and the impact of this policy on the economic situation in the construction sector. In the context of the above discussion, I am asking you:
- Have in your countries in the past several years or more been diagnosed strong correlations in the field of changes in lending policy for housing loans, mortgage loans for citizens and investment loans for enterprises operating in the construction sector and the situation in the construction sector, the economic situation in the entire national economy, growth economic etc.
- To what extent should central banking control the lending activity of commercial banks as regards housing loans, mortgage loans to citizens and investment loans for enterprises operating in the construction sector?
- What kind of lending policy for housing loans, mortgage loans for citizens and investment loans for enterprises operating in the construction sector is adequate for a possible slowdown in the global economic growth in 2020?
- What are the key determinants of credit risk management diagnosed in the field of housing loans, mortgage loans for citizens and investment loans for enterprises operating in the construction sector?
What do you think about this topic?
What is your opinion on this topic?
Please reply
I invite you to discussion
Thank you very much
Dear Colleagues and Friends from RG,
The construction sector is one of the most prosperous in modern economies. In the context of the above issues, the following research question arises: If many investments in the construction sector are financed to a large extent by bank loans, then if commercial banks change their lending policies, can this be a source of significant changes in the economic situation in the construction sector and indirectly also in the entire economy?
What's your opinion on this topic? Regards,
Dariusz Prokopowicz
Dear Rafiq Idris, Rafiq Idris, Rupayan Pal, Hello everyone, thank you for participating in the discussion. Thank you very much for the answers to the question: How strong can be the impact of the banks' lending policy on the situation in the construction sector?
Thank you very much for your inspiring, interesting and highly substantive answer. Your statements confirm that the above-mentioned issues are current and developing. In view of the above, in my opinion, in recent years the importance of impact of the banks' lending policy on the situation in the construction sector. Best wishes,
Have a nice day,
Dariusz Prokopowicz
Dear Adnan Majeed, Thank you very much for participating in this discussion. Best wishes,
Dariusz Prokopowicz
In the country in which I operate, in 2020 interest rates were lowered to a record low. As a result, economic credit in terms of cost has become more accessible to enterprises. However, few companies took out new economic loans because enterprises, including construction sector companies, received government grants and non-repayable loans. Despite the economic recession in 2020, many construction investments were carried out, many apartments were commissioned, the investment processes of which were started in the previous few years. In addition, despite the downturn in the domestic economy, housing prices increased in 2020, in addition to falling prices of office space. If we take into account the issues of changes in international supply logistics and production growth in some industries in the context of a slowdown in economic activity in many service sectors, the economic situation in 2020 was exceptional. This uniqueness is to some extent correlated with the uniqueness of the economic crisis caused by the SARS-CoV-2 (Covid-19) coronavirus pandemic and the specific, known for several decades, Keynsian interventionist instruments of socio-economic, fiscal, budgetary, sectoral and economic anti-crisis policies and also monetary policy. In this special situation, despite rising prices (20-30% in 2020), apartments have become one of the key investment assets. The reasons are virtually unprofitable bank deposits and treasury bonds. Additionally, securities investments still account for a negligible proportion of investment assets in citizens' investment portfolios due to the continuing increased investment risk related to the still unclear issue of the likely significant decline in the impact of the SARS-CoV-2 (Covid-19) coronavirus pandemic on economic processes.
Greetings,
Dariusz Prokopowicz
Dear Rafiq Idris,
You added an interesting new point to our discussion. Please, describe the flexibility of design research, i.e. the wording you used in your answer to the above question, a bit more broadly.
Thank you, Regards,
Best wishes,
Dariusz Prokopowicz
DISCUSSION_D.Prokopowicz_....The significance of banks' lending policy....economic situation...national economy and credit risk lev
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Dear Nawab Khan,
Thanks for answering the question:
How strong can be the impact of the banks' lending policy on the situation in the construction sector?
Please define the problem more fully for the purposes of this discussion.
Thank you, Regards,
Dariusz Prokopowicz
Inflation in the country in which I operate has started to rise since the 3rd wave of the SARS-CoV-2 (Covid-19) coronavirus pandemic. At that time, the main factor behind the increase in inflation was the enormous, historically record-high amounts of unprinted money and introduced into the economy. The use of the national currency to counteract the developing economic crisis was mainly aimed at limiting the scale of the increase in unemployment. The rise in unemployment appeared already during the first wave of the pandemic, mainly in sectors of the economy that were subject to lockdowns as part of anti-pandemic interventionist measures. Public financial aid granted to companies and enterprises was conditional on maintaining employment, even if a commercially operating business entity significantly limited the scale of actually conducted economic activity. In this way, the financial subsidies transferred to companies and enterprises were largely empty money in terms of new economic goods emerging in economic processes, which were then directed to specific markets and sold. This type of interventionist, anti-crisis practice, a distorted version of Milton Friedman's Keynsism and monetarism, led to the generation of a rapid increase in inflation. In countries with an international currency and the scope of national monetary policy, the increase in inflation recorded since the pandemic is mainly due to the supply shock caused by the pandemic economic crisis and the introduction of lockdowns. On the other hand, in a country with a national currency, which is used as an anti-crisis instrument through the procedure of reprinting, inflation is mainly the result of excessive demand and consumption caused by the introduction into the economy of a large amount of additional unpaid money. In the country in which I operate, inflation started to rise from February 2021. However, it was only from October 2021 that the national central bank, i.e. the National Bank of Poland, started to raise interest rates in order to limit the scale of the inflation increase. Until mid-2022, this goal was not achieved despite an 8-fold increase in interest rates. until May 2022 and the so-called Anti-Inflation Shield as part of a relaxed fiscal policy (e.g. tax cuts on the sale of fossil fuels). The reason for the failure of anti-inflationary interest rate increases. by the central bank was not raising interest rates. deposits and deposits by commercial banks while raising interest rates. credits. Only as part of the interventionist, command-and-distributive action of the government, the inflation growth will probably slow down from mid-2022. The government's interventionist, anti-inflation measures are ordering the largest commercial banks, which are state-owned companies, to raise interest rates. deposits and deposits. In addition, from June 2022, citizens will be offered new, special issues of treasury bonds with an interest rate of over 2 times higher percent. than in previous months and equal to the reference interest rate. central bank. However, despite a significant, interventionist increase in interest rates, For basic investment financial instruments, inflation will still be twice as high as the aforementioned increased interest on investment financial instruments. This will mean still a high level of loss of purchasing power, which can only be compensated for by wage increases in workplaces. Due to the growing interest rates on loans in commercial banks' offers, the sales of mortgage loans in 2022 also drop significantly compared to the previous year. The consequence is a decline in the number of transactions in the housing market and a slower growth in real estate prices. Therefore, if commercial banks want to maintain the current levels of sales of mortgage loans, they should liberalize their lending policy in other, non-price aspects, i.e. e.g. in terms of facilitating and / or simplifying procedures in the scope of the procedures for granting loans and / or in the field of creditworthiness analysis. However, due to the forecast economic downturn in many sectors of the economy from Q3 2022, commercial banks are unlikely to ease their lending policies, fearing an increase in systemic credit risk, an increase in the economic downturn in companies and enterprises run by borrowers and, consequently, a deterioration in the quality of the loan portfolio . The forecasted economic downturn in many sectors of the economy from the third quarter of 2022 will result from an increase in fossil fuel prices, an increase in the prices of agricultural produce, various categories of raw materials and other production factors, which will significantly decrease the profitability of production processes in many sectors of the economy. One of the key factors behind the aforementioned price increases is the war in Ukraine, embargoes and trade wars. Therefore, there are many factors that may cause a significant downturn also on the real estate market, mainly in the segment of new investments in the construction of housing estates. Therefore, the government in Poland, after the unsuccessful governmental program Mieszkanie Plus, is currently planning to launch a new program activating the housing market, namely the Apartment without own contribution program. This program, through government subsidies to loans, is to increase the availability of mortgage loans for borrowers who do not have an own contribution in relation to the value of the real estate purchased. The Flat without own contribution program is therefore another program that is essentially intended to help commercial banks maintain a certain level of mortgage loan sales and to help developers building housing estates in preventing possible falls in real estate prices. On the other hand, thanks to this type of government subsidy program, the scale of the potential downturn in the construction and sale of housing estates will be limited.
Best regards,
Dariusz