Last Updated on May 21, 2021 by MoneyVisual
There was a significant shift seen in the spending preferences and productivity which experts think was a result of the disturbances caused by the Great Recession and financial crisis. This contributed to the money lending market and affected it negatively in almost all countries.
The banks and different financial institutions had to make a lot of adjustments in their lending policy which further dampened the foundation of the money lending market threatening its future and credit growth.
It is at this time that the governments of different countries came up with different subsidy schemes to boost the annual growth rate of loans to households. These subsidies were designed taking a lot of factors into consideration such as:
- Spending preferences
- Financing conditions and others.
However, the effect of the financial crisis was not eliminated completely and therefore the dampening effects are still felt which is hindering the development of loans and money lending markets. It is all due to the negative contributions stemming from the disturbances to spending preferences and productivity.
The effect is been seen recently increasing again after it declined rapidly between late 2009 and late 2010. This suggests that the factors affecting economic activity still exist though it was masked for some time due to the heterogeneous developments in different countries.
Reasons for the Shift
Experts suggest that the most important factor contributing to the weak loan growth in a few countries after the crisis is the fact that the loan growth of a few countries has shifted to those countries that have historically shown comparatively low elasticity of loans to GDP.
In addition to that, there are also a few other reasons suggested by experts such as:
- Higher financing costs
- Tighter credit standards and
- The need to correct indebtedness levels.
They also suggested that those countries that were the major contributors to the growth in the pre-crisis period are also highly likely to deteriorate the relationship between GDP dynamics and credit. Therefore, it resulted in the sovereign debt crisis on the funding conditions of the banks. It exacerbated cross-country heterogeneity in the borrowing conditions that eventually resulted in low credit growth and economic activity.
However, the nonbanking financial organizations and private money lenders such as liberty lending USA took this advantage and made the most out of it. Offering loans at a somewhat higher rate resulted in the household credit and current output growth as compared with the developments in previous epochs of economic recovery.
- To some extent, this mirrors the stabilization in the household debt-to-GDP ratio in recent times although this ratio remains elevated. Moreover, considering the sovereign debt crisis in the background, the rising financing costs and tight credit standards will increase the debt burden.
- This will further increase the necessity for deleveraging so that the countries that had high levels of borrowing and money lending previously do not have their credit growth rate dampened.
- In fact, the slow growth rate in the loans to households and chiefly the fact that the annual growth rate of the slender monetary aggregate has weakened sharply to stand at low levels points out to the moderation of economic growth.
This outlook is based on the monetary indicators along with the reliable leading indicator properties for economic developments. It is consistent with the results that are derived on the basis of business cycle indicators.
Expanding the Money Lending Market
While most major banks followed a ‘go slow’ and ‘wait and watch’ policy in money-lending due to the disturbances in productivity and spending preferences, smaller banks, non-bank finance companies, and new online lenders came to the rescue of the households offering them loans. This resulted in the expansion of the money lending market with more credit options available to small businesses, individuals, and households.
The money lending market is further affected both positively as well as negatively due to the amplified concerns of the several post-crisis changes in financial regulation and money lending process. These regulations include:
- New capital surcharges for systemically significant institutions
- The annual bank stress-testing regime of Federal Reserve and
- The enhanced implementation of anti-money-laundering rules.
All these have weighed most heavily on the larger banks and have caused a causal impact on the money market with the introduction and aggressive lending of the different individual channels.
This has documented a sustained and more systematic supply-side shift rather than disturbing the economy with the consequences of this shift in credit supply. With some naturally expected degree of adjustments made over time by other suppliers of credit keeping the dynamic perspective in mind, the annual flow of credit increased deleting the negative contributions to money lending.
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The Results and Implications
The results of such a shift in spending preferences and productivity have a lot of implications.
- It suggests that the credit supply had a meaningful impact on the labor market and its outcomes affected employment and wages.
- In the wake of the financial crisis, banks and financial institutions had to make necessary changes to adapt fast to maintain the annual flow of credit.
- The differences in expansion rates of establishments and employment growth started to normalize signifying an economically and statistically significant impact.
Figures and data also revealed that the borrowers had to pay higher interest rates to obtain loans for shorter maturities all the way through 2014. The importunity of these interest rates affected employment and wages. Therefore, it is required to consider the significances of a long-lived upsurge in the cost of credit especially in a setting where wages are tacky in the short run.
However, the experts and the governments are still on the lookout to condone the effects of the financial crisis in the money lending market. Initially, higher loan rates lead to a temporary thwart in unemployment but when wages adjust gradually the effect on unemployment is dissipated.
However, if credit is expensive businesses will become less capital intensive and households will look for alternative options that will over time affect the entire money lending business. Therefore, longer-run equilibrium must always be avoided to prevent any persistent negative impact.