It’s starting.
Banks and lenders look set to reap the whirlwind of their carelessness of the past few years. They’ve thrown themselves upon the mercy of the state, and now the state is going to demand its pound of flesh.
Central bankers and governments across the West are looking at ways to regulate banks more strictly. Mervyn King, governor of the Bank of England, said yesterday that “much hard thought will have to be given to the structure and nature of banking regulation in future… it seems extremely likely that banks… will be called upon to hold more capital and a greater quantity of liquid assets than hitherto.”
It sounds like a fine idea. Unfortunately, it’s a few years too late…
Speaking to Israel’s central bank yesterday, the Bank of England’s Mervyn King warned that banks must expect tighter regulation going ahead. He also gave the clearest indication yet that he’s now more worried about slowing growth than rising inflation. He said that the interest rate-setting Monetary Policy Committee “must not allow economic growth to slow so much that it pushes inflation below the 2% target.”
The governor now sounds like a man on a mission to reassert his control over events. I suspect that we’ll see an interest rate cut next week, and that it won’t be the last by a long chalk, regardless of what happens to inflation in the short term.
Whether this will help beleaguered homeowners and consumers is quite another matter. The problem with these new ideas for regulation is that they’re way too late. Banks are already tightening lending criteria without any new rules – they can’t afford not to.
A new, more worrying phenomenon has appeared in the mortgage market. NatWest yesterday became the “first lender to increase repayments for existing customers,” writes Harry Wallop in The Telegraph this morning.
The bank has hiked the rate on its offset mortgage from 6.2% to 6.45%, the first time this year that existing borrowers have been hit by rate increases. Meanwhile, the Kent Reliance Building Society lifted its standard variable rate from 7.34% to 7.59% while Royal Bank of Scotland raised the rate on its two-year tracker from 5.99% to 6.79%.
Northern Rock’s unwanted customers are in trouble
This is particularly bad news for anyone with a Northern Rock mortgage. The state-owned bank’s new boss Ron Sandler, has said he wants 60% of current borrowers to remortgage elsewhere by 2011. But clearly, other banks aren’t that keen to take on the business either.
As Ray Boulger of mortgage broker John Charcol told The Telegraph: “For a market already struggling to meet demand, the fact that Northern Rock’s customers are coming up for renewal will only make the situation worse.”
So what about all those poor people who took out the ‘Together’ mortgage, which allowed enabled them to borrow up to 125% of a property’s value? Unbelievably, customers on this deal account for almost a full fifth of Northern Rock’s loan book – £20.8bn of the £107 total. “These are the ones in most difficulty,” as Mr Boulger somewhat understatedly puts it. No one else offers 100% mortgages anymore, so frankly, these borrowers will be stuck with what they can get. Given that they clearly couldn’t afford to be on the housing ladder in the first place, how long will they last when their interest rate rises by say, two full percentage points?
Just as we saw a ‘race to the bottom’ during the good times, with banks competing to offer the lowest rates, regardless of profitability, to attract new custom, it seems we’re seeing the precise opposite happen now. Banks are racing to jack up rates and pull overly popular deals, in the hope of attracting as few customers as possible.
And make no mistake, this time last year, no one was warning customers that this might happen. People were lead to believe that interest-only mortgages were a perfectly normal way to start out on the ladder, that having no deposit shouldn’t be a barrier to buying a house, and that they’d always be able to refinance at some point in the future. Promises on the property market were made that would have had any stockbroker or independent financial advisor dragged over the coals by the FSA, had they said similar things about investing in stocks and shares.
Perhaps as well as looking at how much banks are allowed to lend, regulators should be looking at just how closely they monitor the sale of exotic and risky mortgage products.
Turning to the wider markets…
In London, the FTSE 100 gained 9 points to end the day at 5,702. Miners were among the main risers, helped by stronger metal prices and upbeat broker comments.
Across the Channel, the Paris CAC-40 fell 6 points to end the day at 4,689. And in Frankfurt, the DAX-30 closed 24 points lower, at 6,534.
On Wall Street, stocks picked up after three days of losses. The Dow Jones rose 46 points to close at 12,262. The broader S&P 500 gained 7 points, to 1,322, while the tech-heavy Nasdaq ended 17 points higher at 2,279.
In Asia, Japanese stocks rebounded, with the Nikkei rising 130 points, to 12,656.
Crude oil had fallen back to $101.12 this morning and Brent spot was down to $99.79.
Spot gold had fallen back below the $900 an ounce mark, to $898 an ounce this morning. Platinum fell back to $1,931, while silver was trading at $16.79.
Turning to forex, sterling fell to 1.9799 against the dollar, and was trading at around 1.2599 against the euro. The dollar was last trading at 0.6381 against the euro and 100.21 against the Japanese yen.
And in Europe this morning, Swiss investment bank UBS has reported another $19bn in writedowns for its first quarter. The group is to raise $15.1bn in a rights offer, having already raised around $13bn from investors in Singapore and the Middle East. Chairman Marc Ospel is to step down.
Our recommended articles for today…
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