Banks on stable ground

How exposed are our financial institutions to the increasing mortgage loans making up their portfolio ? The question was asked at a Central Bank press briefing on Monday in light of low interest rates and the availability of mortgages. Katherine Kumar, Inspector of Financial Institutions, said that  data shows that the banks and other financial institutions are on stable ground. She said these financial institutions are buffering themselves against housing risks. “We would look at the investment type by category and we take particular concern of real estate and mortgages, we are looking at situations where they are lending up to 90-95 percent on the value, that they are conservative in their lending as well as provisions against bad loans,” she told reporters.

She said they were also looking at what financial institutions have in place to buffer against bad loans. She said the Central Bank was so far satisfied with what it had seen. “Throughout the system we are satisfied with the provisions that have been set up by the banks and there really is no concern at this point in time,” she said. “Why many countries are worried about the spiraling housing prices and the burst of a housing bubble is the impact it can have on the financial system,” Central Bank governor Ewart Williams told reporters. The fact is that banks do become exposed to housing, he said, noting that once the bubble bursts the value of collateral comes down. He said as seen in the US, the value of your equity has a major impact on your spending habits and therefore, “If your equity declines, then your wealth declines and consumption plummets.”

That, he said, was the main reason for the interest in housing prices. The faster the increase in housing prices, the less people are in a position to acquire housing, he said. In the case of TT, he referred to Government’s programme for low and middle income earners, noting that housing prices in that area was going to be cushioned. He noted though that for upper, middle and  high income earners, housing prices were going up at a tremendous rate. He said this was  “unavoidable” because of low interest rates. “Because interest rates are low, mortgages are more readily available,” he said, stressing that this was his major concern. He noted that low interest rates were pushing people to putting their savings into real estate, rather than in saving instruments. He took the view that what is more important for the Central Bank is the fact that interest rates are low,  and not the fact that house prices are going up for high and middle income earners. “Interest rates are going down,” he stressed.