Datio in Solutum (2). Competition

by Steven van Groningen on 11 February, 2016

Recently I was asked by a television station to confirm that we, in anticipation of the Darea in Plata law, had increased the down payment for our standard mortgage loans from 15% to 35% (40% in EUR). I did this and explained the reasons why. I also explained them in a previous post. This became news, as if such a move was totally unexpected, and drew a series of comments and reactions.

The initiators of the law didn’t comment on my motivation/argumentation. Consistent with their earlier behavior, they preferred not to be bothered by facts and logic and to follow their long standing practice of insulting and threatening their opponents.

It was almost comical to see the statement of one of the supporters of the Darea in Plata law: he had notified the Competition Council. As if the Competition Council doesn’t read the papers and needs encouragement to follow what is happening in one of the most important sectors of the economy.

Darea in Plata will reduce competition

Instead, maybe he should have asked the Competition Council to express an opinion on the Darea in Plata law itself. If the Competition Council would analyse the potential impact of this law, which I warmly recommend them to do, they might conclude that one of its effects is that it will reduce the competition between banks.

Mobility Encourages Competition

An important element in stimulating competition in any sector is the ease with which a consumer can move from one provider to another. This is valid in any industry, banking included. There are specific regulations, including EU Directives, that aim to makes it easier for consumers to switch banks. The easier it is to switch for consumers, the more competition between banks is stimulated. Logic.

Darea in Plata Hampers Mobility

What is now the effect of Darea in Plata on all this? 67% the total loans to individuals in romania are mortgage or home equity loans. When a person contracts such a loan, he/she has the obligation to repay it, including interest, and responds with all his belongings. In these circumstances, banks have worked with down payments from about 5-15%. If and when Darea in Plata comes into force, all new mortgage and home equity loans will be asset-based financings in which the risk of the bank is linked exclusively to the value of the asset. This is a totally different risk profile which will force banks to adjust their risk policies. As I explained here, this will increase the need for down payments.

Refinancing Anyone?

It is not very difficult to see that those who took loans with lower down payments (5-20%) will not be able to get refinancing unless they meet the new criteria (say 35-40% down payment). Very few consumers will be in the position to make an early repayment of  20% of the value of their loan in order to refinance.

So, Darea in Plata basically makes it impossible of anyone who took a loan from a bank before Darea in Plata to refinance this loan and will lock more than 450,000 Romanians in with their loans at their existing bank. No refinancing possible. Please come back in 10 years or so.

Who seems afraid of the Competition Council?

So, I am not afraid that the Competition Council will look at the fact that banks increase down payments. This is a matter of cause and effect and pure logic. I am afraid the Competition Council will not be asked by the initiators to express an opinion on the Darea in Plata law. If they were, they would certainly come to the conclusion that this is bad for competition.

Due process, including impact study is needed.

As before, there are reasons, good reasons, why no country in the world has legislated a “hard” datio in solutum. If we want to consider being the first in the world to do so, we better think this through. At least we might ask Parliament to respect the law and to produce an impact study and ask relevant stakeholders, including the Competition Council, to express an opinion.

Romanian version is available here.

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