4.2 The role of an efficient guarantee system in corporate lending

Chart 4-8: Interest rate spreads in an international comparison for housing loans provided in domestic currency

7 6 5 4 3 2 1 0 Percentage point Percentage point

0 Q1 Q 2 Q 3 Q 4 1 Q1 Q 2 Q 3 Q 4 2 Q1 Q 2 Q 3 Q 4 3 Q1 Q 2 Q 3 Q 4 4 Q1 Q 2 Q 3 Q 4 5 Q1 Q 2 Q 3 Q 4 6 Q1 Q 2 Q 3 Q 4 7 Q1 Q 2 Q 3 Q 4 8 Q1 Q 2 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 Romania Slovakia Poland Czech Republic Euro area Hungary V3 average 7 6 5 4 3 2 1 0

Note: APR-based, smoothed spread over the 3-month BUBOR in the case of variable-rate housing loans or for loans with a rate fixed for up to 1 year, while in the case of housing loans fixed for a period longer than 1 year, the smoothed spread over the relevant IRS. Source: MNB.

Rapid credit growth occurs in equilibrium only if the real economy expands steadily and substantially. Lending, incomes and investment need to increase in tandem, as all three are necessary conditions of sustainable convergence, but none are sufficient in themselves. The lending boom must affect (1) a larger group of customers, (2) in a sound structure (3) at the lowest possible cost. If lending rose dynamically without income growth, it would be unsustainable over the long run. The MNB stands ready

to mitigate risks with its microprudential and macroprudential instruments.

For the credit convergence path to be sustainable,

borrowing needs to be broader based. On the convergence path, households’ outstanding borrowing relative to GDP is estimated to be as high as 40 percent by 2030, with a roughly 30 percent contribution from housing loans. In the context of the current yield curve and income convergence on the macroeconomic path, the payment-to-income ratio would rise from 8 to 14 percent by the end of the time horizon (Chart 4-9). Although this would be slightly above the value before the 2008 crisis, it would not be exceptional in an international comparison (e.g. it is currently higher in Denmark, the Netherlands and Norway) and it would have a sounder structure. Furthermore, if wage convergence is achieved, households may have more leeway in spending their disposable income: therefore, the equilibrium debt service burden is assumed to be higher than prior to the crisis. It is important to note, however, with the assumed credit dynamics that households’ debt service will be sustainable only if it is coupled with broader-based borrowing and with instalments that are predictable over the long run.

Chart 4-9: Households’ debt service

16 14 12

10 8 6 4

2 0 Percent Percent

0 2Q2 Q 4 0 3Q2 Q4 0 4Q2 Q 4 0 5Q2 Q4 0 6Q2 Q 4 0 7Q2 Q4 0 8Q2 Q 4 0 9Q2 Q4 1 0Q2 Q 4 1 1Q2 Q4 1 2Q2 Q4 1 3Q2 Q4 1 4Q2 Q4 1 5Q2 Q 4 1 6Q2 Q4 1 7Q2 Q 4 20 1 9 2 0 2 1 2 0 2 3 20 2 5 20 2 7 2 0 2 9 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Principal payment/disposable income

Interest payment/disposable income 16 14 12

10 8 6 4

2 0

Source: MNB.

Institutional guarantees play a major role in facilitating access to credit for SMEs, which form the backbone of the

economy. Ideally, guarantee institutions enable the financing of viable customers/transactions that would not receive funds, or not in a sufficient amount, in the absence of a guarantee, by mitigating the credit risk of financial institutions.

Under the suretyship undertaken by the guarantee institution, it assumes the debt obligation up to the extent of the guarantee if the customer defaults in exchange for a fee paid by the debtor, thereby reducing the bank’s credit risk. If the debtor defaults and the guarantee is claimed, the guarantee institution pays the bank the debt up to the amount of the guarantee. The amount received later from any other collateral securing the transaction is divided between the institution and the credit institution in proportion of their outstanding claims (Chart 4-10).