Effects Of The Crisis and The Credit Delinquencies: Why Interest rates rise?
Peruvian banking has not suffered by the financial crisis, nowhere near what has been banking in the U.S. or in European Union countries, where the majority of larger entities, and supposedly more solid, had to be progressively rescued by the public sector. This government intervention was necessary due to the inability of the private sector, owner of these entities to provide the highest capital which was needed to tackle the most progressive deterioration of its portfolio, although in many cases can not rule out its "natural" aversion risk.
In such circumstances of crisis, the credit stops expanding and, of course, also increase loan delinquency rates. In this scenario, what would be expected to make credit institutions with the interest rates they charge their customers for their new credit? Is it as simplistic reasoning should upload some? To outline a more responsible about what happens or should happen, should review what happened with the banks in other countries most affected by the crisis.
For example, thanks to his now well-recognized system of supervision, the Spanish banking sector was the best endured the gradual spread of the subprime crisis originated in U.S. in mid-2007 and worsened in the second half of 2008 did not have Rescue use applications or their government or central bank as if they had to do numerous banks and non-bank in the U.S., UK and other European Union countries. However, this did not prevent the credit ceases to expand and increase their level of delinquency.
When the crisis erupted in August 2007, the Spanish credit delinquency rate, measured by the proportion of bad loans in the credit system, was around 0.84%, a level where it had hovered since mid 2004 . However, in August 2008 and late payments had increased to 2.53% (+169 bp) and when the crisis was exacerbated by increasing delinquencies continued: in August 2009 to 4.94% (+241 bp) and in February 2010 5.39% (+45 bp). And of course, until mid-2007 the balance of the loans grew at annual rates exceeding +20%, but after the start of the credit slowdown and grew in mid-2008 at lower rates of +10% annually. In fact, in mid-2009 the growth was almost zero in March 2010 and even became negative.
"They went then these non-corporate interest rates in Spain rose at the same rate as the proportion of bad loans? Well NO. Between 2007 and 2008 the proportion of bad loans rose, on average, from 0.81% to 2.07% (+126 bp) and between 2008 and 2009 rose from 2.07% to 4.65% (+272 bp). However, the equivalent annual interest rates for consumer loans between 2007 and 2008, on average, rose from 9.76% to 10.89% (+113 bp), but between 2008 and 2009 dropped from 10.89% to 10.53% (-45 pb). Also, the equivalent annual interest rates of loans to small businesses between 2007 and 2008 rose from 5.80% to 6.44% (+136 bp), but between 2008 and 2009 fell from 6.44% to 4.67% (-177 bp).
Therefore, what explains the "strange" behavior of interest rates charged by credit institutions in Spain, divorced from the evolution of default rates? As in the U.S., UK or another country "normal," explains the monetary policy. Between 2006 and 2008 euro monetary policy had been gradually hardened to maintain price stability: in 2006 the benchmark interest rates had risen on average by more than +75 bp, in 2007 more than additional bp +100 and in 2008 rose by +25 bp to the crisis worsened and became infected, why then quickly lowered rates in -325 bp between October 2008 and May 2009. Therefore, it is monetary policy, not increased delinquencies, which basically explained the behavior of interest rates of loans.
However, in Peru, one of the representatives of the largest bank in the system have argued that, as consumer loans and micro loans have been "affected" by default, its already very high interest rates (after having been up) late reduced. A myopic argument, but apparently "logical", which usually means repeated almost ad nauseam.
In Peru, when the crisis erupted in August 2007, default rates on consumer loans were 3.07% and 3.95% microenterprise, then in August 2008 fell to 2.47% (-60 bp) and 2.99% (-96 bp), respectively. However, in August 2009 rose to 3.09% (+62 bp) and 4.80% (+181 bp) and in February 2010 came to close at 3.03% (-6 bp) and 5.35% (+55 bp), respectively. But of course, much of this account of rise and fall in the NPL ratio was due to that between August 2007 and August 2008, the balance of consumer loans and micro credit balance rose to a reckless pace both annual more than 40%, but in August 2009 consumer credit started to have a zero growth rate and micro-credit grew just over 10%, a rate that still remained to February 2010.
Therefore, "went down and then raising interest rates for consumer loans and small business banking in Peru at the same rate as the default rate was measured by the proportion of overdue loans? Well, on average, YES. The average interest rates of consumer loans in 2006 was 39.81% and decreased to 36.76% (-305 bp) in 2007 and 36.23% (-53 bp) in 2008, but in 2009 rose to 42.76% (+653 pb). And if rates of interest on loans for microenterprise bank, they dropped from 40.12% in 2006 to 35.74% (-438 bp) in 2007 to 35.11% (-63 bp) in 2008 and 33.96% (-115 bp) in 2009. All interest rate measures that are not "equivalent" because they do not include the ever larger and more numerous related committees received.
Now if we add that monetary policy in Peru in 2007 rose +50 bp its benchmark rate, rose further in 2008 +150 bp and -525 bp reduced in 2009, we find that it seems rather strange Peru, and he is no stranger to corporate banking, is the conduct of monetary policy. The problem with this is that it defies the theoretical structure on which the central bank says to act in the monetary system.
Obviously the explanation of this particular "logic" to determine interest rates also reflects the logic of a "real" competition. There would be more of a concentrated market structure in which larger institutions set interest rates so shortsighted and other entities have only one behavior of fans, not competitors. If the leaders of banking "freely" reduce interest rates, credit spreads and default rates "observed" are reduced, which feeds and their own self-fulfilling expectations, encouraging them to further reduce their rates (which some interpret biased as fierce "competition"). However, when the bank gets the credit, the delinquency rate, "observed" increases, so the "permitted" to raise their interest rates and the process is reversed (and no one dares to explain how the fierce "competition" disappears).
What determines banks then raise or lower interest rates? Probably the "animal spirits" of some, but monetary policy certainly no. However, this shortsighted way in determining "free" rates of interest on loans, depending on the evolution of short-term default rates "observed" and expected loss long term, not just denote a clear lack of sustainability of the "banking business", but introduces a perverse procyclicality for the entire system as a whole.
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