Falling interest rates consciously or unconsciously invite you to take out a higher loan. In 2007, the monthly repayment of a mortgage was $ 1,010 on average. In 2018 this was $ 1,058. The Belgian not only takes out larger loans, but also has more own resources. At the same time, the average net income did not follow this evolution. The inflation correction lagged behind.
The result is greater capital reserves for banks
When the banks are obliged by the government to increase their reserves, it is therefore impossible to pay the shareholders higher dividends. The low interest rate also ensures that the financial institutions are affected by their core activity: using the money from savers and using this to provide housing loans, among other things. More mortgages and other loans are being provided as compensation. It was determined in the month of March of 2019 that no fewer than 5.7% more loans were granted than during the same period in 2018.
Worry at the National Bank
This fact causes real concern at the National Bank. The number of loans granted should normally point to a proportional growth of the Belgian economy. This growth is not being achieved. The mandatory capital reserves of the banks must thus be increased by 0.5% to the governor of the National Bank. This measure is required because our country exceeds the threshold of the European Systemic Risk Board. The proposed measure to avoid structural problems will take effect on 1 July 2019.
Belgium: no single case
More often than is dear to us, it is thought that such a phenomenon is only possible in our country. Countries such as Luxembourg, which has a strong economic reputation, and Ireland too, had to build up capital reserves as a buffer so that the financial institutions in these countries can hold their funds. Consequently, fewer dividends were also paid in these countries.
The quantitative aspect of capital reserves
The majority of Belgian financial institutions have sufficient reserves. They meet the minimum standards imposed by the government. The obligation to work with such buffers should be seen as a warning. The last thing the financial sector needs is a repeat of the 2008 recession.
Temporary aspect of capital reserves
The capital reserves are buffers that must curb the growth in the number of loans. As soon as there are signs of a possible new recession, it is possible to use these buffers. This way losses can be eliminated and the stability of the economy remains guaranteed. Even in these times, it will still be possible to take out loans, although the National Bank urges caution. During the precursor of a financial crisis, it may be a greater challenge to comply with additional regulations.
Mortgage loan policy
Even though the low interest rate helps to ensure that more and more people dare to take out a home loan, the National Bank remains vigilant. This government institution, for example, imposes legitimate requirements with regard to owning capital. On the other hand, there is the working method of the banks which, despite the warnings, do not change their conditions much in practice. For example, home loans where the full purchase price of a home is borrowed remain no exception. In addition, the duration of the loans granted increases. Banks grant a loan fairly easily because they know that consumers would otherwise turn to another financial institution.
Consequences for the consumer
The EB’s interventions aim to ensure stable prices throughout the euro area and to safeguard the purchasing power of European citizens. Because interest rates remain extremely low for 8 years, economic growth also lagged behind. Inflation of around 2% is desirable, but proved not to be a viable map. This phenomenon has favorable consequences for taking out a mortgage. Those who want to save will experience the negative consequences of low interest rates. It is no longer favorable for financial institutions to reward the saving consumer with a higher interest rate on the traditional savings account. The banks no longer need the saver to finance mortgages, as these financial institutions can borrow on favorable terms from the EB. This way the classic saver stays in the cold.