Question

‘Other Lending Institutions’ such as saving institutions in the US are/were developed mainly to provide mortgages to households to help fulfil part of ‘The American Dream” of home ownership which is usually interpreted as a single family detached dwelling, with a yard. In the rest of the world such institutions play different roles. Compare and contrast the roles of such institutions in the US and Europe and what are the implications for increasing the saving rate in both locations?

Answer 1

Other lending institutions have different purposes than the commercial banks because commercial banks are allowed to take retail deposit but these institutions are not allowed to accept deposits from the public. That is why these institutions also came to be known as Non-banking financial institution and they were setup with dedicated purposes. In western world especially US, these banks had access to large base of capital so they could easily focus on one area such as housing so theses so called “Other lending institutions” did play a role in fulfilling the dream of home or the American dream, these institutions also to a certain extent succeeded in their objectives in Europe where they were setup with certain objectives but in developing countries these institutions did not succeed a lot during their early years of operation. A major reason for this was the capital issues, they could not lend more because default will erode their capital base so many such institutions in the emerging markets changed their business model where instead of providing financing for one purpose such as housing, they also considered providing services such as credit card and that had massive success. The savings rate are a slightly tricky thing because if the saving rates are high people normally tend to delay their consumption because they believe they are earning more to delay the consumption so high savings rate normally discourages the activity of housing loan.