Belt and Suspenders
What Is Belt and Suspenders?
In finance, "belt and suspenders" is a casual phrase used to portray conservative lending rehearses.
In view of the thought wearing a belt and suspenders gives the client two repetitive methods for holding up their jeans. By relationship, mindful bankers will look for excess layers of risk moderation while choosing whether to stretch out loans to their clients.
Grasping Belt and Suspenders
The phrase belt and suspenders has been utilized to depict bankers who demand that loan policies be stuck to stringently. All the more generally, it portrays a mentality of needing several layers of safety procedures in place for limiting risk. Albeit the term can be utilized in a complementary fashion to depict a prudent and fair lender, it can likewise convey criticism of ways of behaving considered excessively conservative.
After the 2007-2008 financial crisis, which saw the markets held by an extreme credit crunch, many banks adopted a belt and suspenders strategy as to screening possible borrowers. Loan candidates needed to go through several phases of income verification and payment reserve requirements to fit the bill for loans. Albeit this level of conservatism might have been unreasonably severe, it was in numerous ways something contrary to the subprime lending rehearses which contributed to the then-recent financial crisis.
Belt and Suspenders
This phrase showed up in the Wall Street Journal concerning Robert Rubin, who filled in as Secretary of the Treasury in the Clinton Administration during the late 1990s. Gotten some information about his approach to compliance with campaigning related regulations subsequent to expecting another job as director of Citigroup (C), Rubin answered that the company would "...be belts and suspenders with respect to those."
Real World Example of Belt and Suspenders
The phrase belt and suspenders frequently arises in conversations encompassing increased limitations on lending rehearses. One such recent model can be found in the Canadian housing market, with the presentation of more rigid mortgage rules by the Canadian government in January 2018.
Under these new rules, Canadian banks were required to start screening new mortgage candidates utilizing an extra "stress test" methodology. Under the terms of this new criteria, the banks were required to survey the borrower's ability to pay utilizing the higher of a) their contractual rate plus an extra 2% of interest, and b) the Bank of Canada (BOC) trailing five-year benchmark rate.
The expectation behind this new rule was to test whether Canadian borrowers would have the option to assimilate likely cost increments on their mortgages, if interest rates ought to rise. The rule change happened in the midst of a setting when interest rates had been falling, on average, for several continuous years. Most onlookers of the new rules saw them to act as an illustration of belt and suspenders banking. A few invited the more conservative standards, while others saw them as unnecessarily restrictive.
Features
- The phrase "belt and suspenders" is utilized to portray conservative lending rehearses.
- Lending standards generally change over the long run, becoming stricter following periods of stress like the 2007-2008 financial crisis.
- Contingent upon the specific situation, it can have either positive or negative undertones.
