"Risky Business", National Post, Tuesday, March 03, 2009
This article talks about the accusation that Canadian banks are not lending enough money. The real problem, however, is actually the collapse of lending from banks outside Canada. Because the foreign banks have been withdrawing from Canada, Canadian banks are having problems with impaired capital. Banks are expected to price loans on cheap credit from governments, not risk. Many people are complaining that the banks are being unfair and denying credit lines, but they do not understand that the big problem is risk. Because of the current economy crisis with increasing unemployment rates, the banks need to be careful to whom they lend their money to. High interest rates are needed to cover for the future, in case people and/or businesses do not repay their loans.
In chapter 15, we learned about the importance of analyzing financial statements. We also learned about how financial statements are used by banks to evaluate borrowers’ abilities to repay loans. This article relates to chapter 15 by showing how Canadian banks are being cautious to whom they lend money out to, because the current economy is not doing very well, which increases the risk that loans will not be paid back. The banks need to look at a company’s ability to make a profit as well as the worth and marketability of the company’s assets in case they need to be sold to repay the loan before they decide to give out credit or not.
In my opinion, I think that the banks are correct to be careful when giving out loans. With increasingly high unemployment rates and businesses closing, there is a huge risk that loans lent out cannot be paid back. That will cause the banks to lose profit and make the economy even worst. I understand that no one likes to pay high interest rates for loans, but I think it is necessary for the bank to do so, just in case they do not get money back in return. Furthermore, I think that foreign banks withdrawing money from Canadian banks is another reason why Canadian banks need to be very cautious, since their capital is limited.
http://www.financialpost.com/story.html?id=1346372&p=1
1 comment:
I agree that the banks should set a reasonable rate that is not too low just in case that they can't get their money back. Also, there ARE many people who borrowed money from the bank but have nothing to pay off that loan. However, if the economy is falling, banks may have to think about lowering a bit of the interest rates. Why? Well, I think if businesses arent able to get some money on hand, they will surely close down their business. I believe that will just lead to the continuance of the falling of global economy.
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