Belt and Suspenders

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.

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.