No repeat of 2008
Research suggests that unlike 2008, credit growth has “not been driven by subprime borrowers”. This means borrowing is being led by more trustworthy debtors. Prime borrowers make regular payments, on time, in full. With good reputations leading the way, it helps put aside fears we are about to see a repeat of the credit crunch.
In 2008, banks allowed too much lending. When a bank approves a loan, it is “making new money”. The new money, while not spendable, is used to speculate on markets. This includes mortgages (affecting house prices) credit cards and personal loans. Eventually the amount borrowed, paired with interest rates, makes the amount unpayable. Piled, unpaid debt then leads to bankruptcy risks.
Eventually, lending caused the collapse of a number of banks. So what is different this time? Stats suggest it is purely that those borrowing now are in a better financial state than in 2008. Does that alone mean banks and consumers can rest easy? Unfortunately, no is the answer.
While prime borrower led credit is still a worry should the bubble increases too much, it isn’t a long term risk (if banks have learned from the past). Controlling credit and repayment allows for stable growth. Managing that growth and speculation is what keeps markets and cashflow stable.
Prime borrowers can become subprime though if credit is offered too freely. As in 2008, interest rate rises, mortgage rate rises and risks of defaulting and bankruptcy can destabilise the entire system. As such keeping debts in the “good debt” category is a must.
Growth is not bad for the economy so long as it is regulated. With consumer lending hitting an 11 year high earlier last year, some economists asked for caution. Caution is always advisable when it comes to handling money. With growth being a positive if managed correctly, that caution can become cautious optimism if the credit situation remains manageable and strong.
Much has been learned from the credit crunch. The austerity and fallout has tested many families’ ability to tighten their belts. It has also ensured tougher regulation on lending and on how banks operate.
Moving forward, the word of the day is balance. Balance between the money loaned, the interest rates kept, and the repayments coming in. If banks and consumers can continue to build slowly, and positively, perhaps more and more borrowers can be considered “prime”.