scholarly journals Premature repayment of fixed interest mortgage loans without compensation, a case of misguided consumer protection in the EU

2022 ◽  
Author(s):  
Hans-Bernd Schäfer ◽  
Alexander J. Wulf
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Consumer Protection ◽  
Formal Model ◽  
Panel Study ◽  
Consumer Welfare ◽  
Theoretical Point ◽  
The European Union ◽  
Mortgage Loans ◽  
High Interest Rate

AbstractConsumer protection shifts risks from consumers to businesses. This raises marginal costs and equilibrium prices. It is justified when markets are not strong enough to allocate contractual risks or accident risks efficiently, especially in cases of severe asymmetric information between suppliers and consumers. Consumer protection can then increase the consumer’s expected welfare from a contract. We test these considerations in a theoretical and empirical study on consumers' right to early repayment of mortgage loans without damage compensation to the creditor in the European Union. We show in a formal model that such a right can lead to an impairment of consumer welfare, compared with the traditional rule of expectation damages for breach of contract. This applies if the consumer is risk averse and repays a loan with a high interest rate in a low interest period to take up a new loan for the same project at lower interests. From a theoretical point of view, this right has no solid economic underpinning, if it is not restricted to cases of personal hardship of the consumer and serves an insurance purpose. We present empirical evidence supporting this argument. In a panel study on monthly mortgage interest rates of 23 EU Member States between 2005 and 2017 we show how interest rate spreads change with the level of consumer protection.

scholarly journals Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints

2018 ◽  
Vol 10 (12) ◽  
pp. 4803 ◽  
Author(s):  
Qiuyi Yang ◽  
Youze Lang ◽  
Changsheng Xu
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking Sector ◽  
Housing Prices ◽  
Policy Implications ◽  
Shadow Banking ◽  
High Interest Rate ◽  
Asset Bubbles ◽  
Collateral Constraints ◽  
High Level

Recently, China has witnessed a continuously increasing Debt-to-GDP ratio and a vigorously expanding shadow banking sector. Housing prices hovering at a high level seriously affect the lives of ordinary residents. Disappointingly, a variety of activities such as intense deleveraging campaigns and tight monetary controls produce little effect. Why do these seemingly rightful implementations hardly work? What should governments do to stop the incessant expansion of asset bubbles? What role ought financial supervisors to play in regulating credit markets and facilitating a sustainable and inclusive economic growth? This paper sets off from the pledgeability of asset bubbles and constructs a generalized overlapping generation (OLG) model incorporating financial frictions and collateral constraints, in order to explore the bubble evolution under the alterations of market interest rates and credit conditions. The results show a unique bubble equilibrium, in which the steady-state bubble size expands when interest rate increases. Numerical results further reveal that the bubble-inflation effect of a higher interest rate is reinforced by a more stringent collateral constraint. Our research contributes to an explanation of the inefficacy of present policies and provides the following policy implications: The combination of an interest rate elevation and a strong loan restriction is in fact undesirable for suppressing asset bubbles. Not merely does it strike productivity and capital formation, but it also fosters investors to hold more risky assets to solve liquidity shortage under constrained borrowing capacity.

scholarly journals THE DETERMINANTS OF INTEREST RATE SPREAD AMONG COMMERCIAL BANKS IN KENYA

2017 ◽  
Vol 2 (5) ◽  
pp. 29
Author(s):  
Leah Njoroge ◽  
Mercy Warui ◽  
Catherine Mbogo ◽  
Margaret Chiera ◽  
Dr. Chogii
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Market Structure ◽  
Significant Relationship ◽  
Commercial Banks ◽  
Banking Sector ◽  
Unique Contribution ◽  
High Interest Rate ◽  
Interest Rate Spread ◽  
The Interest Rate

Purpose: To establish the determinants of interest rate spread among commercial banks in Kenya. Methodology: The study utilized a descriptive survey research design. Findings: The results indicated that the commercial banking sector has witnessed a gradual rise in the Interest rate spread. Results also showed that the mean of market structure has been fluctuating with year (2010) being the lowest with mean of 4 and year (2012) being the highest with mean 12. Results also showed that there was no regulation from the year (2005) to the year (2009) but it was later adopted whereas regulations shoot steadily to mean of 1.0 in the year (2009) and remained in the same level the rest of the years. The regression results indicate that there is a positive and significant relationship between market structure, credit risk and interest spread. The regression results also indicated that there is a positive but insignificant relationship between access to information and interest spread. Further, the results indicated that there is a negative and significant relationship between regulation and interest spread. Unique contribution to theory, practice and policy: The study is important to the management of Commercial banks as it will provide an insight on the factors influencing interest rate spread among commercial banks in Kenya. The results of this study will provide information to policy makers and other stakeholders in the financial sector (especially the banks) to come up with strategies that help in dealing with the high interest rate spread experience in the banking sector and thus improve on the financial performance of the organisations. It may be used as a tool for persuading commercial banks to reduce their interest rates spread and hence increase their volume of business, which of course would compensate the loss in the interest rate spread. The study will also be invaluable to the government and CBK. This is because the monetary policy framework of Central Bank of Kenya and its implementation will be guided by a need to ensure, among others: realistic interest rate spreads that encourage financial deepening and a safe, sound, efficient and competitive banking system through discreet risk management. These findings therefore might influence the effectiveness of economic policies. The research results will also be important to scholars and researchers as it will add to the existing pool of knowledge.

Consumer Protection in EU Residential Mortgage Markets: Common EU Rules on Mortgage Credit in the Mortgage Credit Directive

2014 ◽  
Vol 16 ◽  
pp. 223-253 ◽  
Author(s):  
Tatjana Josipović
Keyword(s):  
Consumer Protection ◽  
Financial Sector ◽  
The European Union ◽  
Mortgage Loans ◽  
Mortgage Markets ◽  
Residential Mortgage ◽  
Cross Border ◽  
Mortgage Credit ◽  
Mortgage Credit Directive ◽  
The Eu

AbstractFor many years now, there has been an attempt in the European Union to create a common legal framework for mortgage credit contracts and cross-border activities in the mortgage financial sector. One of the greatest challenges has been the establishment of a corresponding level of consumer protection in EU residential mortgage markets. This issue has become particularly important at the time of financial crisis. Consumers are increasingly exposed to the risk of losing their homes because of failing to fulfil, in due time, their obligations arising from mortgage loans, and thus losing confidence in the EU financial sector. Therefore, the European Union has intensified its efforts to improve consumers’ ability to inform themselves of the potential risks when entering into mortgage loans and mortgaging their real property. On 4 February 2014 the EU adopted the new rules on mortgage credits in the Mortgage Credit Directive. The main objective of the Directive is to increase the protection of consumers in EU mortgage markets from the risks of defaults and foreclosures. A higher level of protection must be ensured by consumers’ increased information capacity related to mortgage credits, as well as by developing a responsible mortgage lending practice across the EU. The Mortgage Credit Directive is also aimed at contributing to the gradual establishment of a single internal market for mortgage credits. In this chapter, the author analyses previous and current attempts by the EU to establish a uniform market of mortgage loans, and assesses the possible impact of the Mortgage Credit Directive on the protection of consumers in the market of mortgage credits and on the development of cross-border activities in the mortgage financial sector. Special emphasis is placed on the possible impact of the new EU rules on mortgages on national protection measures aimed at consumer protection at the time of financial crisis. The transposition of the Mortgage Credit Directive will undoubtedly contribute to a higher level of consumer protection when consumers enter into home loan contracts. However, the question arises whether, because of different levels of harmonisation of some rules laid down in the Directive, its implementation will actually contribute to an increase in cross-border home loans. The possibility for Member States to opt for increased consumer protection in some aspects of credit agreements when implementing the Directive, or the existence of different options for the exercise of individual rights that they may use cannot bring about an integration of mortgage credit markets.

scholarly journals Impact of Macroeconomic and Bank Specific Variables on Spread of Interest Rate: A Study of Listed Commercial Banks in Bangladesh

2020 ◽  
pp. 148-156
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking System ◽  
Money Market ◽  
High Interest Rate ◽  
High Interest ◽  
Income Sources ◽  
Interest Rate Spread ◽  
The Difference ◽  
Indirect Impacts

The Banking system of a country provides the lifeblood to the efficient and effective functioning of an economy. Therefore it is crucial to understand the lending and borrowing rates and hence the spread of interest rates in the banking and financial sector. The Spread of Interest rate is the difference between loan rates and the deposit rates of a bank. High-interest rate reflected in the spread of a high-interest rate will immensely disrupt and cause adverse consequences in the whole economy. Both the spread of interest rate and the interest margin show that the intermediation cost is higher in Bangladesh. High-interest margins in a banking system are indicative of deep-rooted symptoms of inefficiency, absence of competition, non-diversification of income sources, and skewed development of money and capital market in favor of banks’ lending and inflexibility of rate adjustments symmetrically in response to market changes. Moreover, a frequent financial scam in Bangladesh has added more troubles in the money market of Bangladesh. For example, Hallmark scam of almost 4000 crore taka of Sonali Bank, a financial scam of Abdul Mannan, CEO of BIFC, amounted to around 950 crore taka, around 4500 crore taka scam of Janata bank and Agrani bank have made our money market and financial market susceptible to failure. These events have some direct or indirect impacts on interest rates. Hence, I have felt the importance of identifying the determinants of the spread of interest rates. Understanding the determinants of the spread of interest rates would enable us to eliminate such unnecessary costs in financial intermediation, which would be the result in operational and administrative efficiency, resulting in financial viability, stability, and economic growth. Therefore, we need to know the determinants of the spread of interest rates. Hence, I have been motivated to study the determinants of interest rate spread and their extent of impacts on interest rate spread.

Sustainability of Local Government Sector Debt. Evidence from Monte-Carlo Simulations

2016 ◽  
Vol 14 (1) ◽  
pp. 115-132 ◽  
Author(s):  
Krzysztof Kluza
Keyword(s):  
Monte Carlo ◽  
Interest Rate ◽  
Local Government ◽  
Interest Rates ◽  
Local Governments ◽  
The European Union ◽  
Investment Policies ◽  
Government Sector ◽  
Systemic Problems ◽  
The Impact

The financial standing of local governments across the European Union was strongly affected by the economic crisis. The local government sector conducted vast investment policies reaching 10.2% of all investments in the EU countries in 2010. However, at the same time its indebtedness expanded significantly. The current low interest rate environment makes the sector vulnerable to future interest rate increases. The presented research analyses the impact of several scenarios of interest rate changes in Poland on the local governments’ ability to service their current debt burdens. Simulations are conducted with the Monte Carlo method. Some scenarios indicate a high vulnerability of local governments to adverse changes in market interest rates, but only if they are combined with a reduction of sector’s operating surplus. Such an economic setup may give rise to systemic problems for the whole public sector.

Exchange Rates, Interest Parity, and the Carry Trade

2019 ◽  
Author(s):  
Craig Burnside
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Interest Rates ◽  
Structural Break ◽  
Theoretical Models ◽  
Rate Of Change ◽  
Necessary Condition ◽  
Information Frictions ◽  
High Interest Rate ◽  
Interest Parity

The uncovered interest parity (UIP) condition states that the interest rate differential between two currencies is the expected rate of change of their exchange rate. Empirically, however, in the 1976–2018 period, exchange rate changes were approximately unpredictable over short horizons, with a slight tendency for currencies with higher interest rates to appreciate against currencies with lower interest rates. If the UIP condition held exactly, carry trades, in which investors borrow low interest rate currencies and lend high interest rate currencies, would earn zero average profits. The fact that UIP is violated, therefore, is a necessary condition to explain the fact that carry trades earned significantly positive profits in the 1976–2018 period. A large literature has documented the failure of UIP, as well as the profitability of carry trades, and is surveyed here. Additionally, summary evidence is provided here for the G10 currencies. This evidence shows that carry trades have been significantly less profitable since 2007–2008, and that there was an apparent structural break in exchange rate predictability around the same time. A large theoretical literature explores economic explanations of this phenomenon and is briefly surveyed here. Prominent among the theoretical models are ones based on risk aversion, peso problems, rare disasters, biases in investor expectations, information frictions, incomplete financial markets, and financial market segmentation.

scholarly journals Exchange Rates, Interest Rates, and the Risk Premium

2016 ◽  
Vol 106 (2) ◽  
pp. 436-474 ◽  
Author(s):  
Charles Engel
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Risk Premium ◽  
Uncovered Interest Parity ◽  
Foreign Exchange Risk ◽  
High Interest Rate ◽  
Exchange Risk ◽  
Foreign Exchange Risk Premium ◽  
Interest Parity ◽  
Empirical Regularity

The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real interest rate countries tend to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two findings have apparently contradictory implications for the relationship of the foreign-exchange risk premium and interest-rate differentials. We document these puzzles, and show that existing models appear unable to account for both. A model that might reconcile the findings is discussed. (JEL E43, F31, G15)

scholarly journals A Paradox: An Empiric Approach to Inflation-Interest Rates Relationship: Evidence from Turkey

2019 ◽  
Vol 11 (3) ◽  
pp. 49
Author(s):  
Gülgün Çiğdem
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Weighted Average ◽  
Central Banks ◽  
Short Term ◽  
Causality Test ◽  
Policy Makers ◽  
High Interest Rate ◽  
Economic Agents ◽  
The Republic

In today’s world where the independence of central banks is questioned and the recessionary process is discussed, serious debates are experienced between economists and policy makers regarding the paradoxical relationship between two important macro-economic variables; Is inflation the cause of interest rate or is interest rate the cause of inflation? Determination of the causality and its direction is very crucial for the economies which are trying to extricate themselves from the high inflation – high interest rate spiral. The researchers searching for an answer to these discussions have conducted various analyses to test the validity of the Fisher Effect. In these analyses, inflation rate and nominal interest rate -as per the hypothesis- were considered as the variables. However, economic agents make their decisions depending on real values rather than nominal values. The purpose of this study is to provide a real and up-to-date approach to these debates which actually began in 1700s and have been ongoing in the triangle of financial markets-central banks-policy makers. For this purpose, the monthly averages regarding the 2011:01-2019:06 period of Turkey were calculated based on the Weighted Average Cost of Funding (WACF) daily data of The Central Bank of the Republic of Turkey (CBRT) and subjected to the cointegration analyses with the annual CPI figures. While Engle-Granger Test was used to test the long-term relationship, Granger Causality Test was performed to determine the relationship and its direction in the short term through VECM. As a result of the analysis, bilateral causality among variables was determined in the short term. In other words, inflation is a cause of interest rate and interest rate is a cause of inflation. This study makes a contribution to the literature since no study, which detected a bilateral correlation, has been found.

scholarly journals Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

2019 ◽  
Vol 1 (1) ◽  
pp. 27-42
Author(s):  
Dean Karlan ◽  
Sendhil Mullainathan ◽  
Benjamin N. Roth
Keyword(s):  
Decision Making ◽  
Interest Rate ◽  
Consumer Protection ◽  
The Philippines ◽  
Simple Experiment ◽  
High Interest Rate ◽  
Financial Decision Making ◽  
High Interest ◽  
Intervention Treatment ◽  
Financial Decision

A debt trap occurs when someone takes on a high-interest-rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by refinancing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households. (JEL D14, D18, D91)

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