Chapter 12: Problem 453

What might happen to the housing construction industry if commercial banks are allowed to compete freely with mutual savings banks?

Short Answer

Expert verified

In short, if commercial banks are allowed to compete freely with mutual savings banks, the housing construction industry could experience growth and expansion due to lower interest rates, relaxed lending standards, and increased loan availability. This may result in an increased demand for new housing construction as more consumers become able and willing to purchase newly-built homes. However, this analysis is only a rough outline of potential outcomes, as other factors such as local market conditions and regulatory changes can also influence the industry.

Step by step solution

Understanding commercial banks and mutual savings banks

Commercial banks are for-profit institutions that offer a wide range of banking services to individuals and businesses, including deposit accounts, loans, and investment services. Mutual savings banks, on the other hand, are owned by their depositors and primarily focus on providing savings accounts and mortgage loans to individuals. They often have more conservative lending standards and tend to offer better interest rates on savings accounts.

Impact on interest rates

If commercial banks are allowed to compete freely with mutual savings banks, one of the first things we might see is a change in the interest rates on mortgage loans. Commercial banks may try to offer more competitive rates in order to attract mortgage borrowers from mutual savings banks. This increased competition could result in lower interest rates overall, which could make housing construction more affordable for consumers and potentially stimulate demand for new homes.

Impact on lending standards

Commercial banks might also work to loosen their lending standards in order to compete with mutual savings banks for mortgage borrowers. This could result in a higher number of mortgage loan approvals and an easier path to obtaining a loan for potential homebuyers. In turn, this could lead to an increased demand for new housing construction as more people have access to the necessary financing to buy a home.

Impact on loan availability

Increased competition between commercial banks and mutual savings banks could also lead to greater availability of mortgage loans. As commercial banks attempt to capture a larger share of the mortgage loan market, they could expand their product offerings and create more opportunities for borrowers. This increased availability of loans might also contribute to increased demand for new housing construction.

Overall impact on housing construction industry

In summary, if commercial banks are allowed to compete freely with mutual savings banks, we might see lower interest rates, relaxed lending standards, and increased loan availability, all of which could contribute to an increased demand for new housing construction. This could lead to growth and expansion in the housing construction industry as more consumers are able and willing to purchase newly-built homes. This analysis, of course, is only a rough outline of potential outcomes, as many other factors (local market conditions, regulatory changes, etc.) can also influence the housing construction industry.