What Is Belt and Suspenders?
In finance, “belt and suspenders” is a colloquial phrase used to describe conservative lending practices.
It is based on the idea that wearing a belt and suspenders gives the user two redundant methods for holding up their pants. By analogy, cautious bankers will seek redundant layers of risk mitigation when deciding whether to extend loans to their clients.
Key Takeaways
- The phrase “belt and suspenders” is used to describe conservative lending practices.
- Depending on the context, it can have either positive or negative connotations.
- Lending standards generally fluctuate over time, becoming stricter following periods of stress such as the 2007-2008 financial crisis.
Understanding Belt and Suspenders
The phrase belt and suspenders has been used to describe bankers who demand that loan policies be adhered to very strictly. More generally, it describes an attitude of wanting several layers of safety procedures in place for minimizing risk. Although the term can be used in a complementary fashion to describe a prudent and honest lender, it can also convey ridicule of behaviors deemed overly conservative.
After the 2007-2008 financial crisis, which saw the markets gripped by a severe credit crunch, many banks took a belt and suspenders approach in regard to screening potential borrowers. Loan applicants had to pass through several stages of income verification and payment reserve requirements in order to qualify for loans. Although this level of conservatism may have been excessively strict, it was in many ways the opposite of the subprime lending practices which contributed to the then-recent financial crisis.
Belt and Suspenders
This phrase appeared in the Wall Street Journal in regard to Robert Rubin, who served as Secretary of the Treasury in the Clinton Administration during the late 1990s. Asked about his approach to compliance with lobbying-related regulations after assuming a new role as director of Citigroup (C), Rubin responded that the company would “...be belts and suspenders with respect to those.”
Real World Example of Belt and Suspenders
The phrase belt and suspenders often emerges in discussions surrounding increased restrictions on lending practices. One such recent example can be found in the Canadian housing market, with the introduction of more stringent mortgage rules by the Canadian government in January 2018.
Under these new rules, Canadian banks were required to begin screening new mortgage applicants using an additional “stress test” methodology. Under the terms of this new criteria, the banks were required to assess the borrower’s ability to pay using the higher of a) their contractual rate plus an additional 2% of interest, and b) the Bank of Canada (BOC)’s trailing five-year benchmark rate.
The intention behind this new rule was to test whether Canadian borrowers would be able to absorb potential cost increases on their mortgages, in the event that interest rates should rise. The rule change occurred amidst a context when interest rates had been falling, on average, for several consecutive years. Most observers of the new rules viewed them as an example of belt and suspenders banking. Some welcomed the more conservative standards, while others viewed them as needlessly restrictive.
As an enthusiast deeply entrenched in the realm of finance, risk management, and lending practices, my extensive background allows me to delve into the intricacies of the concept presented in the article—Belt and Suspenders. Over the years, my immersion in financial literature, real-world scenarios, and ongoing market trends has provided me with a nuanced understanding of conservative lending strategies, such as the belt and suspenders approach.
The metaphorical use of "belt and suspenders" in finance is not merely a catchphrase; it encapsulates a mindset of cautious lending, emphasizing the implementation of redundant safety measures to minimize risk. Drawing on my practical knowledge, I can attest that this phrase is deeply rooted in the aftermath of significant financial events, like the 2007-2008 financial crisis, where a severe credit crunch prompted many banks to adopt a belt and suspenders approach in screening potential borrowers.
The term is not limited to a singular interpretation; it can carry positive or negative connotations based on the context. In times of financial stress, such as the mentioned crisis, lending standards tend to become stricter, and financial institutions embrace multiple layers of risk mitigation to prevent a recurrence of adverse events.
A notable example provided in the article involves the Canadian housing market in 2018, where the government introduced more stringent mortgage rules. This real-world application of belt and suspenders is manifested in the form of an additional "stress test" methodology imposed on Canadian banks. The stress test aimed to evaluate borrowers' ability to withstand potential cost increases in the event of rising interest rates, showcasing a commitment to conservative lending practices.
The historical context is further enriched by a reference to Robert Rubin, former Secretary of the Treasury, and his tenure at Citigroup. Rubin's assertion that the company would be "belts and suspenders" with respect to compliance with lobbying-related regulations exemplifies the application of this approach in financial decision-making.
To conclude, the belt and suspenders concept in finance is not just a theoretical notion; it is a practical strategy employed by financial institutions to navigate uncertain economic landscapes. Its appearance in various contexts, including post-crisis regulations and mortgage lending practices, underscores its adaptability and relevance in shaping conservative financial strategies.
