Low Bank Interest Rates
Since the beginning of the recession, the Federal Reserve has worked hard to keep interest rates down, with bond buying programs like Operation Twist and QE4. For borrowers, these decreased rates have been intended as encouragement to help the economy recover and bring up confidence. But for banks, these low interest rates have been seen as cutting into potential profits. Wells Fargo (WFC) CEO John Stumpf said to American Banker that current borrowing rates have kept some banks from lending when they know interest rates will rise.
Additionally, many banks are still cautious to lend, with both the financial crisis in recent memory, and new rules from the recession keeping banks from acting on the same practices that led to the recession.
“I understand why policymakers and regulators and legislators don’t want to be put in the situation they were in 2008,” Stumpf said. However, he added that while there is reason to try out these current policies, there isn’t any need for additional ones either.
While it may seem enticing for banks to increase risky lending in order to combat these low interest rates, it’s important for financial institutions to continue lending to qualified borrowers to avoid losing additional profits. With credit and risk management software and other risk management systems, banks can make accurate decisions about loan and mortgage applicants. By using increased information to make credit decisions, lenders can continue to increase their lending to make up for the low interest rates and remain solvent.