It’s hard to think of an industry with a more dismal track record on treating its customers than British banks. Over the last 20 years or so, they’ve shown themselves to be ruthless, cynical, insensitive and greedy. Whether it be closing down branches and forcing customers to hang on the phone for hours to talk to ignorant and unhelpful call-centre staff; or hard-selling unsuitable and over-priced insurance products; or fleecing unsuspecting customers with hidden and inexplicable account charges; this is an industry that has relied far too much on its customers’ inertia, while – as we now know – running reckless risks with their money.
So I’ve got some sympathy with Gordon Brown’s attempts to stop the banks from booting people out of their homes the moment they run into trouble with their mortgages. In the last house-price slump, banks were heartless. With repossessions up an eye-watering 70% in the second quarter of this year to 11,000, and more than a million people in negative equity, widespread misery at the hands of the banks over the coming year is certain. Brown is right to remind them – and the courts that grant repossession orders – that repossession should be a last resort.
But it is one thing reminding banks of their responsibilities, and quite another to put obstacles in the way of the normal functioning of the market. For Brown, the temptation to insist that newly government-controlled banks halt repossessions will be intense. Already, some Labour MPs are demanding the Government intervene at Northern Rock, which currently has the highest repossession rate in the country.
Brown must be careful not to risk making a bad situation worse. In some cases, alternatives to repossession, such as long-interest holidays or extending the term of the loan, may make sense. But very often, the result will simply be to add to the overall bad-debt burden weighing on the bank system, while prolonging the house-price slump and delaying recovery. Japan found itself in this situation for much of the 1990s, when its banks were unable or unwilling to face up to their debts. The sooner house prices find a level at which new buyers and new lenders are willing to come in, the sooner this crisis will pass. Keeping people in homes they can no longer afford just means prices will take longer to reach the bottom.
It also runs the risk of fuelling moral hazard. If borrowers come to believe that it is possible for them to default on their mortgage payments without losing their homes, or that the banks will be forced to go through a lengthy court process before they will be forced to move out, then more people will be tempted to default on their loans or demand changes to the terms. If that took place on a large scale, it would add to the stresses in the banking system. Sadly, the health of our banking system depends on people believing the threat of swift repossession is all too real.
Of course, it may be that Brown’s real worry is that failing to halt the surge in repossessions will lead to such a rapid slide in house prices as banks dump homes on the market that the resulting losses risk overwhelming the banking system. But if that is the worry, then the answer is to inject even more capital into the system over and above what the Government has already promised. That may yet become necessary. But if ’twere to be done, then better for all of us that ’twere done quickly.
Can the euro survive the credit crunch? Critics have long argued that a single currency without a single government is a recipe for failure. But until now, the eurozone has managed to get round this by agreeing on a common set of rules – the stability and growth pact – that limited government borrowing to 3% of GDP. Meanwhile, the bond markets implicitly assumed the eurozone would never allow a member to default, so euro government bonds all traded on similar spreads.
But the credit crunch is causing a rapid reappraisal. Many EU governments only ever paid lip service to the fiscal rules and now many are likely to see debt levels balloon. Meanwhile, Italian government bonds have started trading on spreads 100 basis points wider than German government bonds – a huge difference. That suggests the market is starting to price in the prospect that Italy may default and not be bailed out.
Is that likely? If that happened and Italy remained in the euro, the single currency would be dramatically weakened. But kicking Italy out would be difficult and messy. No wonder some in the City are betting on the collapse of the single currency by buying credit default swaps on EU government bonds and selling the euro. However, there is a third option – that faced with the risk of the euro falling apart, the eurozone would swiftly move to closer political union. That’s what President Sarkozy is clearly pushing for – and that’s where my money would be too.
• Simon Nixon is the author of Credit Crunch: How Safe is Your Money? Priced £5.99, www.pocketissue.com.