Banks’ lending comes from four main sources: directly from borrowers, through the purchase of bonds from sellers of cars and other consumer goods, by repurchasing debt sourced from other banks and by purchasing drafts from sellers of commercial paper. (Edward W. Reed and Edward K.Gill, 1989)
1.2.4 The role of bank credit
1.2.4.1 For banks
In production and business activities, the top goal of enterprises and economic organizations is to maximize profits, the top goal of banks. A currency trading organization is no exception to that purpose. Banks earn profits through service activities, providing customers such as payment, consulting, most importantly, credit activities.
Indeed, a bank as a financial intermediary does business on the principle of customer deposits (capital mobilization) in the form of current accounts and deposit accounts. On that basis, the bank conducts lending activities in many different forms, depending on the loan requirements of customers. The difference between interest earned through operations and interest paid on deposits is the profit earned. This is not the entire profit of the bank, but credit is the main business of the bank, accounting for the largest proportion of the total profit of the bank.
Banks operating in the competitive environment of the market mechanism, banking credit activities become more diversified. For commercial banks to be able to survive and develop in a competitive environment, contributing to promoting the social economy. The commercial banking system always has to find ways to improve its credit strategy by expanding credit. Currently, in the economy, cash flows are circulating in every state of society, so the amount of money left behind in goods has not been received or when sold but has not yet been received. At that time, businesses want to invest more, so they look to credit channels. When the amount of goods sold is recovered, repay the credit accounts (Vietnam Open Educational Resources, 2010).
Banks often promote credit activities for real estate because this is one of the areas that create large credit balances and have a relatively fast growth rate. Therefore, commercial banks compete by diversifying real estate credit products, increasing the proportion of real estate outstanding loans at the same time as increasing credit capacity for a series of real estate investors, contributing to the process of developing real estate loans. real estate regeneration.
1.2.4.2 For the economy
– Bank credit promotes the accumulation of idle capital in society and improves the efficiency of capital use.
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Research on the impact of real estate prices on bank credit - 1 -
Research on the impact of real estate prices on bank credit - 2 -
Research on the impact of real estate prices on bank credit - 3
– Bank credit contributes to speeding up the process of expanding production load, promoting investment and development.
– Bank credit plays an important role in the regulation of money circulation. – Bank credit contributes to improving national competitiveness
– Real estate credit capital is one of the resources in society that provides housing opportunities for the majority of people, in order to stabilize and improve the efficiency of life as well as to develop production for businesses, from which increase competitiveness, create job opportunities and attract labor. In addition, through credit capital for programs and projects to develop housing, urban areas, commerce, infrastructure, and the banking system, the banking system contributes to speeding up the process of urbanization and embellishment. urban face, attracting investment from external sources, contributing to the industrialization and modernization of the country. (Vietnam Open Educational Resources, 2010).
1.3 The impact of real estate prices on bank credit
1.3.1 Interaction relationship between bank credit and real estate prices
Firstly, bank credit has a close relationship with real estate prices in the economy, including developing or developing economies. According to the empirical studies of (Ben Bernanke and Mark Gertler, 2000; Nobuhiro Kiyotaki and John Moore, 1997; Zhu, 2003), there exists a two-way causal relationship between bank credit and real estate prices, the coincidence. random association of the real estate price cycle with the bank credit cycle. The rise in real estate prices, adding to optimistic expectations about future economic prospects, increases the borrowing capacity of businesses and households by increasing the value of collateral. Plus a portion of available credit can also be used to buy real estate, pushing up property prices even further.
On the one hand, research by (I-Chun Tsai and Chien-Wen Peng, 2010) in models of debt capacity and credit demand of households and firms is affected by changes in prices. assets, which are often used as collateral for bank loans. A plunge in real estate prices can affect the solvency, potential, and willingness of households and companies to repay loans. A sustained increase in housing prices for a long enough time will form a psychological anchorage at high prices among residents, which is supported by certain stimuli that can trigger an initial wave. The spread of housing and housing caused the demand for credit to increase. On the other hand, according to the research of (Song Ha, 2013) the increasing inflow of credit capital into the market will contribute to supporting housing demand and thereby contributing to further increasing real estate prices. When the real estate market declines, product liquidity freezes, real estate businesses and borrowers face difficulties, resulting in huge bad debts in commercial banks.
Second, according to the debt deflation theory (Fisher, 1933), a series of links between asset prices, commodity prices, economic activity and the financial sector, can trigger a bearish shock negative development occurs. After a wave of optimism and confidence, which led to overinvestment, excessive debt and inflated asset prices, corporate and household balance sheets are heavily impacted by asset prices and volatility. interest rate movement. A sudden drop in confidence triggers a desire to reduce debt, followed by asset liquidation, which leads to a fall in asset prices and a rise in real interest rates. The result is a fall in the value of collateral that banks lend, triggering a wave of bankruptcies, shrinking bank lending, and falling output (GDP). These problems continue to create a wave of weakening confidence, the market continues to overreact, further reducing asset prices, leading to a further decrease in the value of borrowers’ assets. where this “decline” gradually develops.
This process is enhanced by the negative impact on the balance sheets of financial institutions due to the decrease in asset value and the increase in bad debt ratio, further causing credit institutions to reduce lending (whether voluntarily or arrested). required by operators), and individual borrowers also want to reduce debt, liquidate assets to start a new development cycle. In a more general interpretation, asset prices have affected the value of bank capital, both directly in the sense of assets owned by banks and indirectly in terms of secured loans. real estate property. Through the impact on banks’ balance sheets, real estate asset prices affect banks’ risk tolerance and willingness to extend loans when the value of these collaterals changes. , also affects the psychology of households and businesses when their asset values change. It can be said that the impact of real estate prices on bank credit in two different directions and comes from both lenders and borrowers.
According to empirical research (Doan Thanh Ha and Le Thanh Ngoc, 2013) in Vietnam, in the period 2000-2010, the increase in real estate credit outstanding has contributed to supporting housing demand, thereby promoting fevers. Real estate prices take place faster and stronger. However, the process of rapid growth of housing prices also had an impact, stimulating demand for credit to increase. The interaction between housing prices and credit flows from banks is therefore bidirectional.
1.3.2 The impact of real estate prices on bank credit
First, asset prices can have a direct effect on credit demand. Asset prices influence consumers’ perceptions of wealth, enticing them to change their spending and borrowing plans to be able to balance spending their whole life. An upward change in asset prices can therefore induce wealthier sentiment, and their willingness to increase spending as well as being bolder in their borrowing plans, which in turn leads to a change in demand. Credit.
Second, real estate prices affect the value of the bank’s capital, directly on the assets owned by the bank and indirectly on the value of loans secured by real estate (Davis, 1993). Real estate prices affect banks’ risk tolerance and their willingness to extend loans. The price of the property can be determined by discounting the future cash flows of the income from the property. An increase in credit can lower interest rates and encourage economic activity now and in the future. As a result, property prices can rise because of higher expected returns on properties and lower discount rates.
Third, households and firms may be limited in borrowing due to asymmetric information in credit markets and moral hazard issues. As a result, households and businesses can only borrow when they can provide collateral (in particular, real estate) and since real estate accounts for a significantly larger share of private sector assets than other assets (OECD, 2000), so their ability to borrow depends to a large extent on the value of their collateral. And according to this interpretation, asset prices are a factor affecting bank credit.
Fourth, when large foreign investment flows into developing countries, the absorption of capital will be beyond the capacity and at this time capital will flow into markets including the real estate market, leading to an increase in real estate prices. , starting a race to speculate on real estate prices through credit loans. In addition, mortgage loans with real estate were also granted an increased limit because the price increased, leading to a higher loan rate. Easy lending conditions lead to rampant borrowing, which in turn pulls up lending rates and increases banks’ profits. Until the market is no longer attractive and profitable enough by financial liberalization, foreign investment will quickly withdraw from the market of developing countries, leading to the bursting of asset bubbles. Real estate fell sharply, lending interest rates remained high, bad debts increased rapidly and credit narrowed. Fifth, on the real estate supply side, when the supply increases, leading to competition between projects, the real estate price may decrease plus the psychology of waiting for the price to decrease more before taking out a loan to invest. On the demand side, it’s increased demand for real estate plus pushing up prices because investors are optimistic about the future financial outlook, while the supply side response is slow because construction can take several years. In the last year the market demand decreased, the supply became too much compared to the demand, leading to a decrease in real estate prices. Banks can simply ignore the effects of low-frequency real estate price shocks in good times and extend credit when the shock is strong, leading to bad performance.
1.3.3 Some empirical research results in the world on the impact of real estate prices on bank credit
Deflation, Credit and Asset Prices (Charles Goodhart and Boris Hofmann)
In this paper, the authors estimate the VAR model including real bank credit, real GDP, real estate prices and short-term interest rates. The analysis included 12 countries: G7 countries, Sweden, Norway, Finland, Hong Kong and Singapore. Data series from Q1 1985 to Q4 2001
The research model is as follows:
tt + + Anxt-n + + xt = A1xt-1 +
According to (Charles Goodhart and Boris Hofmann, 2003) a look back from the historic financial crises of the late 19th and early 20th centuries and more recent periods of boom cycles in credit markets shows that The accumulation of financial imbalances is reflected in asset prices, especially real estate prices, rather than in consumer prices. Consumer prices react with a certain lag following developments in the credit market. Consumer price “inflation” is often low or even falling during credit booms and peaks afterward. Property prices, especially real estate prices, on the other hand, appear to follow closely or even ahead of bank credit. Results of assessing the nature of the strong empirical correlation between banks and asset prices show that changes in real estate prices have a significant effect on bank credit in most countries, while changes in real estate prices have a significant effect on bank credit. Bank credit shocks that affect property prices are found in only a few countries. Changes in interest rates have been found to have a significant negative impact on asset prices in some countries, while overall bank credit is not sensitive to interest rate movements.
Bank Lending and Property Prices: Some International Evidence (Boris Hofmann)
The author of this paper analyzes the relationship between total bank credit, real GDP as a measure of aggregate economic activity, residential real estate prices and real money market interest rates in 20 countries. countries: USA, Japan, Germany, France, Italy, UK, Canada, Switzerland, Sweden, Norway, Finland, Denmark, Spain, Netherlands, Belgium, Ireland, Australia, New Zealand, Hong Kong and Singapore. The data for industrialized countries are obtained from the IMF and the BIS. Data for Hong Kong and Singapore are from the CEIC database. Data series from Q1 1985 to Q1 2004.
Research models:
t = 0CIt-1 + + 2 t+ 3 t+ 4 tt- 1 +
Where ∆l is credit growth, ∆y is GDP growth, ∆p is the change in real estate prices and ∆r is the change in short-term lending rates.
Research results are that long-term causality appears to go from real estate prices to bank credit rather than vice versa. This finding suggests that the real estate price cycle, which reflects changing beliefs about the future economic outlook, drives the credit cycle rather than banks overlending, financial liberalization. , loose monetary policy, is the cause of the real estate price bubble.
Bank Lending and Property Prices in Hong Kong (Stefan Gerlach and Wensheng Peng)
The author of this study investigates the long-run relationship between bank credit and real estate prices in Hong Kong under a co-regression model incorporating multivariables such as property prices, bank credit, interest rates and GDP, and found that the strong correlation between real estate prices and bank credit seems to be due to real estate prices affecting bank credit, rather than vice versa. They argue that excessive bank lending is not the root cause of the boom and bust cycle of the Hong Kong property market.
Convoy Regulation, Bank Management, and the Financial Crisis in Japan (Yoshinori Shimizu)
The author presents a theory of bank credit and collateral to explain the lending activities of banks and the important role from rising land prices in Japan with data series from March 2014. 1955 to March 1999 included a period of high property prices from March 1955 to December 1974, a period of decline in property prices from January 1974 to December 1990, and finally a period when the real estate market closed. from January 1991 to March 1999. Based on the estimated response functions, empirical analysis of the relationship between land prices, bank credit and capital raised in the capital market indicates that there is at the relationship between land prices and financial market activities, and loans to small and medium-sized enterprises and capital raised in capital markets are affected by housing prices.