Fatih Özatay, PhD - [Archive]

Instead of getting angry at banks… 24/05/2009 - Viewed 1715 times

No matter what type of accusations the officials bring against banks, I believe the essence of the issue is obvious for us: Loan market is different; it does not function like the pottery market. Person demanding a loan gets it today and in exchange promises to pay it back in a certain date in the future. What if the promise is not kept? Therefore banks, even under normal conditions, go over the application with a very fine comb before extending a loan.

Under abnormal conditions, as is currently, banks believe that the possibility to receive back the extended loans has been reduced as production of the corporate sector headed downwards. As a result, they become anxious, they not only split hairs but also reduce amount they lend, recall some loans or ask for additional guarantee.

A solid economic program that takes the crisis seriously must be implemented and perceived risk must be suppressed so that the anxiousness of banks will be reduced. Under the current circumstances it is not logical to criticize banks for not extending loans. Again in such an environment, loan rates to not fall down: First, the rise in realized risks, i.e. in the amount of non-performing loans pushes the costs up. Second, banks take into consideration the risk that the costs go up further in the future. Let me develop this...

Hakan Atasoy, a reader working at OECD nowadays frequently send me articles that contain interesting computations. Last one is exactly about this interest rate issue. Core idea is: Yes, while deposit interest rates fall down, loan rates do not change much. Therefore, an impression that the gap between loan rates and deposit rates is widening is created. And this adds fuel to the campaign against banks. However, banks have to keep reserves to compensate for non-performing loans, as a legal requirement. If there was no such requirement, banks can use the reserve to extend loans or make profits by buying Treasury bills. Thus, as required reserves bank keep goes up given that non-performing loans go up; banks are deprived of a significant amount of interest income.

So, the gap between loan rates and deposit rates must be addressed as well considering the mentioned cost on banks. In that case, it is possible to see unlike the complaints argue, the gap is closing rather than widening. What is more, the main reason that prevents a reduction in loan interest rate becomes crystal clear.

Table 1 summarizes the competitions that Mr. Atasoy sent. Data forming the basis of the computations are taken from May bulletin of Banking Regulation and Supervision Agency (BDDK) and covers all bank types. It uses the average of the values for the beginning and the end of the period (December and March) for deposit, loan and non-performing loan values. Dividing loan interest income by value of loans; deposit interest expenses by value of deposits; and required provisions by value of loans as given in the income table in the bulletin, related income and costs (interest rates) are calculated. The calculation is made for TL and FX loans as well as overall amount of loans.

If only the gap between loan interest and deposit interest is considered, it seems that the gap has widened significantly over the last year. The difference, for instance, for overall amount of loans rises from 4.8 to 6.8 percent. On the other hand, if provision costs are also considered; the difference falls down rather than increasing from the previous year. And second, it decreases to a more 'merciful' level over both years.

But the most important point is: Rising risks have a significant role in the inability to reduce loan rates. By rising risks, I mean rising non-performing loan rate. And also think that banks consider the possibility that this rate might rise further in the future. In that case, we turn back to square one: If you want loan rates down, please take measures that will reduce risk perception. I guess it is not necessary to remind you that getting angry at banks is not among those measures.

This commentary was published in Radikal daily on 24.05.2009