How would you rate the activation of commercial banking loans, i.e. an attempt to stimulate economic activity and economic growth of the country through the policy of low central bank interest rates?
Under what economic conditions such a monetary policy may be conducted so as not to over-invest economic processes, i.e. not to overly high the level of investment processes and acceptance, most business entities have too high levels of investment risk and too high levels of credit risk by banks commercial?
How should the process of managing systemic risk in the central bank be improved and how should the process of credit risk management be improved in commercial banks so that no further financial crisis is generated?
I have answered these questions in my scientific publications whose links I have posted below.
In view of the above, inviting you to discuss the above issues, I am asking you the following question:
How would you rate the activation of commercial banking loans through low central bank interest rates?
Please reply
I invite you to discussion and scientific cooperation
Dear Friends and Colleagues of RG
The issues of risk management in the context of determinants of the global financial crisis, globalization processes, technological progress and other factors I described in the publications:
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Article Soft monetary central banking policy and Plan for Responsibl...
Article APPLICATION OF DATA BASE SYSTEMS BIG DATA AND BUSINESS INTEL...
Article GLOBALIZATIONAL AND NORMATIVE DETERMINANTS OF THE IMPROVEMEN...
Article Determinants of credit risk management in the context of the...
Article Importance and implementation of improvement process of prud...
Article The role and application of Keynesian macroeconomic anti-cri...
Article THE SHADOW BANKING AS AN EXAMPLE OF INEFFICIENCIES IN THE FU...
Article ACTIVATING INTERVENTIONIST MONETARY POLICY OF THE EUROPEAN C...
Article A safe monetary central banking policy as a significant inst...
I invite you to discussion and cooperation.
Best wishes
Low interest rate loans can be very useful for economic development; however, in reality, loans are granted based on unilateral benefits of the banks and they are not quite beneficial in the long run.
You can think of this central bank policy initiative as short run gain and possibly long run pain. That is, the lower loan rates will encourage firms to borrow in the near term and generate current period economic activity. However, as firms load up on higher levels of debt they incur higher financial risk and are susceptible to operating losses and perhaps bankruptcy if loan rates rise rapidly later on. This is analogous to having a few drinks at a party and being merry only to wake up the next morning to a hangover.
Credit rationing must be taken into account in these considerations. On crisis phases of the credit cycles might not work due to low willingness to take risks.
A dated reference, but even so good article, on the demand and supply of commercial bank loans is:
https://www.jstor.org/stable/1991388?seq=1#metadata_info_tab_contents
And contrary to popular opinion changes in interest rates have a negative impact on bank profitability:, see the following:
https://www.bis.org/publ/qtrpdf/r_qt0212g.pdf
Further, in addition to the effect of rates on bank loans the behavior of management in terms of bank risk taking (credit risk tolerance) affects both bank loans and monetary policy (in the domain of central banks), citing:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1654582
Low interest rates lead to a decrease in interest margin of commercial banks and banks are forced to search for a new business model. Although the applied business models can vary across countries, the common tendency is to increase the volume of loans (at low interest rate) to compensate for the decline in interest margins. This can increase credit risk and central banks could (and should) use regulatory measures to force the banks to apply a more cautious credit policy. Another problem - especially from the medium term and long/term financial stability point of view - can be the worsening of the loan-to-deposit ratio. Volume of loans is increasing, however, volume of deposits is stagnating or declining a little,
It is difficult to stimulate savings and deposits under current interest rates conditions. Banks are sometimes trying to fill the gap in long-term resources by issuing new bank bonds, but he demand for these bonds is not sufficient. A possible way to increase the long-term resources of banks is reducing the dividend payments and increase retained earnings. However, this is an unpopular solution.
Dear Reza Biria, Raymond A K Cox, Dmitry Burakov, Joshua O. Ighalo, Raymond A K Cox, Nirmala S.V.S.G, Monika Sestakova, Thank you for participating in this discussion and providing inspiring and informative responses. Thank you very much for the interesting information and inspiration to continue deliberations on the above-mentioned issues. Thank you for your answers and confirmation of the above theses. I also believe that low interest rates are one of the most frequently used instruments (in terms of monetary policy instruments) to activate entrepreneurship and stimulate economic growth.
Thank you very much and best regards,
Have a nice day,
Dariusz Prokopowicz
During the SARS-CoV-2 (Covid-19) coronavirus pandemic, interest rates were significantly lowered in 2020 as an instrument of interventionist, mild, anti-crisis monetary policy. However, now (October 2021) economic growth is so high and inflation is also increasing additionally that central banks have started to raise interest rates again.
What do you think about it?
Thank you very much,
Best regards,
Dariusz Prokopowicz
Dear Monika Sestakova,
Yes. That's right. In 2020, interest rates from record lows were further lowered to contain the emerging economic recession caused directly and indirectly by the SARS-CoV-2 (Covid-19) coronavirus pandemic. On the other hand, in 2021, when economies quickly recover from the economic crisis in 2020 and inflation is rising due to the introduction of additional anti-crisis money into the economy, interest rates are raised. The question now (end of 2021) arises: Will the current and subsequent interest rate hikes significantly exceed the levels of interest rates in 2019, i.e. in the period prior to the outbreak of the pandemic?
Thank you very much,
Best regards,
Dariusz Prokopowicz