Does a Lender’s risk appetite change when there are signs of a financial crisis?

Does a Lender’s risk appetite change when there are signs of a financial crisis?

Crises always inevitably have an economic impact. At the start of the health crisis, Covid19, the World Economic Forum predicted that global growth would fall by -3%. Two years later in March 2022, McKinsey published a report citing that geopolitical instability is the greatest threat a country faces when it comes to economic growth. The report was published in response to the crisis in Ukraine regarding the country’s invasion by Russia. If we look back to the 2008 financial crisis, it was so deep and protracted that it was given the name ‘the Great Recession’. Economic recovery following the financial crisis was unusually slow. 

However, with all crises that cause an economic impact, there is a rebound strategy. One particular strategy is lending. In an unregulated economy, banks are key institutions. They are able to grant loans and accept deposits to both businesses and individuals. Banks can act as a bridge between those who are facing a money shortage and to those who have a surplus of money

The modern economy that we live in is a credit economy. Credit can serve the economy for numerous purposes. Its primary function is to promote economic activity. Following the aftermath of the Covid19 pandemic, lenders providing credit to businesses and households can have a great impact on the pace that the economy can return to healthy levels. In essence, banks who lend money to companies during times of financial hardship can be the very reason that business does not shut down for good and survives. However, surviving in a post crisis world where a recession follows is another mountain to climb. In the event of a recession and more organisations demand loans, interest rates begin to rise. With increased interest rates, this can then make the repayments of loans more challenging for the people or businesses that have sought out the initial credit in the first place as monthly payments begin to increase. 

With the potential threat of recession, a topic that Vorto Trading has been exploring is whether lenders are starting to have stricter parameters before they’re willing to authorise credit. 

When it comes to lending, the impacts are indirect when it comes to a recession. For instance, the values of homes can decrease, which in turn can reduce the amount of equity people have in their properties. This then can limit a person’s potential to sell their property profitably. Unemployment can rise, which means the chances of people not being able to pay back loans are higher. The truth is, the risk is greater for any borrower during the event of a recession. This therefore makes banks more cautious when it comes to authorising loans and credit.

Vorto is pleased to announce that the business is offering a new product to our clients. We will be partnering with a company that will lend to foriegn nationals that have no pre-existing UK footprint.  They are also open to providing credit to people with adverse credit history.

If you’d like to find out more, please ask one of our team members today!