What Is The Barrier?

Adams, William, Liran Einav, and Jonathan Levin (2009), “Liquidity Constraints and Imperfect Information in Subprime Lending,” The American Economic Review 99(1), 49–84.

The financial crisis emerged because of an excessive deregulation of business operation of financial institutions and of abusing the securitization mechanism in the absence of clearly defined rules to regulate this area in the American mortgage market (Krstić, Jemović, & Radojičić, 2013). Deregulation gives larger banks the opportunity to loosen underwriting lender guidelines and generate increase opportunity for homeownership (Kroszner & Strahan, 2013). After deregulation, banks utilized many versions of mortgage loans. Mortgage loans such as subprime and Alternative-A paper loans became available for borrowers challenged to find mortgage lenders before deregulation (Elbarouki, 2016; Palmer, 2015). The housing market has been severely affected by fluctuating interest rates and the requirement of large down payment (Follain, & Giertz, 2013). The subprime lending crisis has taken a toll on the nation’s economy since 2007. Individuals who lacked sufficient credit ratings or down payments resorted to subprime mortgages to finance their homes Defaults on subprime and other mortgages precipitated the foreclosure crisis, which contributed to the recent recession and national financial crisis (Odetunde, 2015). Subprime mortgages were appropriate for borrowers with substandard credit and Alternate-A paper loans were

Before the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the general conception of government safety nets, the United States banking industry was quite different than it is today. Depositors assumed substantial default risk and even the slightest changes in consumer confidence could result in complete turmoil within the banking world. In addition, bank managers had almost complete discretion over operations. However, today the financial system is among the most heavily government- regulated sectors of the U.S. economy. This drastic change in public policy resulted directly from the industry’s numerous pre-regulatory failures and major disruptions that produced severe economic and social

The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking (Zandi, 2008). Additionally, expert analysis on the 2008 financial crisis assert that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down

The state’s lawmakers felt that borrowers would always need small loans, and banning them would only make consumers turn to riskier finance schemes such as borrowing from unscrupulous lenders and organized criminals. The state now permits these lenders to make reasonable profits by charging higher interest rates “to allow lenders who meet the conditions of this chapter a rate of charge sufficiently high to permit a business profit.”

One can only speculate as to why the data reflects such a dramatic decrease in the number of consumer loans processed in 2014, but based on the responses captured by the System survey it would appear that the increased costs to comply with the revised consumer lending regulations and reluctance by some System institutions may be some of the major factors. However, the mass majority of institutions indicated although there is an added cost or added regulatory burden they will continue to process consumer loans subject to TIL in some capacity. The following responses were grouped by the most common theme: (System Survey, [12])

* Not only do borrowing and lending rates differ due to taxes and transaction costs, but some individuals are screened out of legitimate credit markets altogether due to informational asymmetries

Easy availability of credit in the U.S. has been sighted as the primary reason behind Subprime mortgage crisis that occurred in 2007. However, the other factors or fault lines responsible for this crisis tend to be deep and are not easily recognizable or rather have lead to the primary factor of easy credit availability. Our aim in this chapter is to understand what these other factors are and to examine whether there existed alternate feasible and long term

Financial institutions are the intermediaries that connect savers with borrowers, providing these parties with access to the financial markets (Cecchetti, 2015, p. 64). In their role as financial intermediaries, the functions these institutions are responsible for help the US economy operate more efficiently. They reduce both transaction and information costs within the financial system by standardizing loan products and borrower screening processes. These institutions also minimize risk for savers by pooling their resources and lending the pooled funds to many borrowers. Doing so meets the needs of savers, who can access their funds when they need them, and borrowers, who can utilize borrowed funds on the terms that best meet their needs

The 2007-2008 home loan rise in the United States, and overall credit emergency, highlighted why banks are so vigorously managed; with such a key part in the economy, wrongdoing or botch among banks can deliver far-running waves when they come up short.

In the bank-firm relationship, switching cost arise from the asymmetry information between firms and banks, which gives the lock-in power for banks to gain extra rent from their customers, thus weaken the substitutability of loans offered by different banks (Shy, 2002; Vesala, 2007). In addition to the administrative costs of changing a bank account in the loan market, there are additional costs associated with information asymmetry that the current lender knows more about the quality of the firm than a potential new lender. Hence, this confidentiality allows banks to exploit their informational advantage over competitors and lock in their incumbent customers to earn higher profits on repeated lending. Switching costs in banking represents a source of rent that reduces the competiveness of the market.

However, it is reported that SMEs suffer from limited access to external financing around the world. The major reason of being this difficulty is due to the limited information on SMEs for potential lenders (Baas and Schrooten, 2006). Many studies argue that this specific information problem can be mitigated by relationship banking as banks can collect private information about their costumers over time (Ongena and Smith, 2001). Therefore, relationship banking is useful for helping SMEs to receive external finance (Berger and Udell, 2002). This dissertation is going to examine the effects of relationship banking on the UK SMEs access to financing

While the term ‘bank resolution’ is a relatively recently engineered concept, various references and forms of it have developed over the last decade. The BCBS Supervisory Guidance on Dealing with Weak Banks, 2002 refers in detail to the characteristics of a weak bank and the various methods of dealing with them, including bank resolution. While this Guidance Paper refers to bank resolution as restructuring or closure of a weak bank, the IMF paper on Managing Systemic Banking Crises, 2003, refers to bank resolution as the intervention or takeover of insolvent or non-viable institutions by the authorities. Almost ten years later, after the experiences of the financial crisis, the definition of bank resolution has narrowed down to the special arrangements for banks that are failing or likely to fail. This more niche definition is utilized in post-financial crisis context, since earlier intervention (i.e. prior to the state of insolvency of a bank) is necessary to avoid greater systemic damage to the financial system. Bank resolution has now evolved to a more specific intervention mechanism where authorities identify problem banks before they become insolvent and take action to restore the bank to viability to prevent financial instability.

It does this by reducing transaction costs and monitoring investments on behalf of lenders. Secondly, to make the borrower better off such that the borrower has an incentive to take out a loan. Thirdly, to carry out the above functions while making profit so as to keep the business afloat (Matthews and Thompson 2005). Because the bank’s profit is a function of the profitability of the borrower, the bank would prefer to lend to borrowers with a higher probability of return. (Stiglitz and Weiss, 1981). This means that borrowers with a lower probability of return, i.e. poor borrowers have a much lower chance of getting loans. Coupled with the bank requirements for obtaining a loan, such as specific kind of collateral and the characteristics of rural credit markets such as informational gaps, existence of segmentation & interest rate variation and preference for exclusivity; this makes for a vicious circle for poor people in the society. This creates the need for some form of microfinance whereby poor people could also receive credit.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide