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We’re seeing the first steps of lenders preserving capital – Harris

by: Maria Harris, director at Digital Cat Consultancy
  • 22/06/2020
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One of my favourite quotes is: “The best way to predict the future is to create it” but in the current crisis making any predictions about the future feels like a fool’s folly.


My internal radar is screaming like a siren though as the mortgage market settles into an early return and lenders calibrate their risk appetites and lending volumes in response.

Positivity is a natural state for the mortgage market; we are a resilient bunch after all and have weathered many a storm in the 15 years I’ve worked in financial services, but the cloud that is overshadowing my naturally positive state feels potentially huge.

This cloud comes from the signals on how our economy and housing market might look next year.

I’ve seen various predictions that the housing market will recover over the next six to nine months, current house prices are holding steady and the pent-up demand from lockdown is working its way through the system.

But six months can be a long time in an unpredictable global crisis.


Employers cutting their cloth

We’ve already started to see the impact of big industries cutting their cloth to survive the pandemic with 600,000 jobs lost in the first few weeks of lockdown and many waiting for the furlough scheme to end before the next wave hits.

This wave is looking likely to be a severe and seismic spike.

The end of the government support schemes will be the turning or breaking point for many businesses of all sizes and the resultant spike in unemployment will be the biggest determining factor on the housing market and lending volumes next year and beyond.

The Institute of Employment Studies has reported that an additional 1.6 million claims for benefits have been submitted since March, the fastest rise since the depression of 1929.

Furthermore, economists are predicting up to 10 per cent of the UK workforce could be unemployed by next year, which is a level we’ve not seen since the mid-90s.


Funding costs

For lenders, the cost of funding and cost of capital are the two foundations which underpin everything they do and one of the biggest risks to both of those things is unemployment.

Consumers have already taken their first steps in paying down household debt, clearing a record £7.4bn of personal loans and credit card balances in April but with one in five workers surviving on reduced or furloughed incomes and unemployment starting to rise, it cannot be long before savings once again become a battle ground for retail banks.

With wholesale funding markets still only tentatively open this will undoubtedly drive up the cost of funds.

Reduced spending and lower personal debt also mean less income for banks, so the funding gap gets squeezed at both ends.

Since the global financial crisis, all lenders have seen intense regulatory focus on capital and risk management to ensure we can withstand another crisis and it is working.

Banks and non-bank lenders are in a much better place than ever before to steer themselves through this, but survival comes at a cost.

Capital buffers are there predominantly to absorb losses and as the unemployment rates and company closures inevitably translate to missed payments then arrears and possessions, managing and protecting capital becomes critical.


Early signs of belt tightening

One of the first steps in preserving capital is usually to reduce new lending either through tightening credit policy, reducing loan to values (LTVs) or lower loan sizes.

It feels like we’re starting to see the early signs of this as higher LTV lending is withdrawn and lenders look to protect themselves and consumers against a future fall in house prices.

I’m not an economist and I don’t have any better insight into the future than the rest of the market, but I am listening to my inner voice and it’s telling me to be prepared for tough times ahead.

We’ve proven before that we are resilient, and this crisis has shown that we can adapt quickly and transform our businesses swiftly when we need to.

So maybe this is a good time to harness those leadership skills and steer a path through whatever storms are coming our way.



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