During times of war, the state seizes control of the economy and any notions of pure, unbridled capitalism perish.
Greater interference from government is the last thing the mortgage market needs.
Unfortunately, that’s exactly what we are about to be presented with in the form of the Independent Commission on Banking’s (ICB) report.
The Treasury has admitted the reforms will hurt banks’ profits and reduce the taxes they pay. It says that the reforms will be cheaper than a repeat of 2008, but that misses the point.
No amount of regulation can offset bad management of banks.
JP Morgan has suggested the proposed reforms threaten to scythe down lenders’ profits by as much as a quarter. It predicts, if implemented, the ICB proposals would reduce Lloyds share price by 25% next year.
At a time when UK lenders are struggling to meet their already modest lending targets, anything that further constrains their capacity to lend is unwelcome.
The immediate concern must be rebooting the economy and staving off a double dip recession.
Lenders have a crucial role to play in that – it is vital banks are allowed to lend money to the business and individuals who will fill the void created by public sector austerity.
That also holds true for the mortgage market.
Mortgage lenders already have to contend with a variety of threats to their balance sheets.
Admittedly, leverage ratios are down, capital and liquidity have improved and most of the Special Liquidity Scheme support has been repaid, with just £20bn of the original £185bn outstanding.
Nevertheless, UK banks still face considerable challenges.
Economic growth is weak and it also remains unclear whether sufficient provisions are in place to deal with loans shown forbearance across the banking system.
The Bank of England warned 60% of Lloyds’ lending book is high or very high LTV, while RBS and Santander have roughly a third of their lending in that category.
High LTV lending is still painfully depressed. The e.surv Mortgage Monitor showed mortgages with LTVs of more than 85% accounted for only a tenth of all lending in July, well below the peak of more than one fifth back in autumn 2007.
For the property chain to kick-start into action, lenders need greater capacity to increase their lending to first-time buyers, who are the lifeblood of a healthy housing market.
Regulation and reform will only take us so far.
By the time Sir John Vicker’s recommendations become law – which now looks as far away as 2019 – the likelihood is that the banks will have found new approaches that blunt the most significant plans for regulation in any case.
The financial services sector has a history of being one step ahead of the game.
The premise under which the Vickers report was set up is sound – to ensure the taxpayer does not have to underwrite the ‘casino’ investment wings of high street banks.
However, it contains a number of recommendations that will further handcuff lenders without significantly reducing the risk of a repeat of the 2008 banking crisis.
For instance, Lord Myners was particularly critical of its recommendations for lenders to hold greater equity.
Increasing capital requirements will force mortgage lenders to charge higher margins for their loans and lower margins on deposits.
The Vickers’ proposals stipulate lenders hold 10% in core capital and up to a further 10% in loss absorbing capital like bonds.
The UK’s big banks have risk weighted assets of around £2trn, implying they will need to raise a further £140bn in securities.
This assumes banks have the capital to spare.
Even if they do, they will have to divert capital away from their loan books, which will put the brakes on an already brittle mortgage market.
Forcing banks to hold more capital does not make a repeat of 2008 less likely; it just reduces the severity of any crash.
In some ways, it is a perverse recommendation because it fails to address the key reason behind the 2008 collapse – banks’ inability to take responsibility for their investment arms.
Yet, also hinders there capacity for new lending. UBS lost its £2.3bn because of poor stewardship and internal management, not because of a lack of regulation.
To stamp out rogue trading and casino banking, investment arms would need to be completely separated from the retail arms, not simply ring-fenced where lenders can transfer capital between both branches.
The ICB’s recommendations are a botched compromise and will only serve to hinder the mortgage market.
Richard Sexton is business development director of e.surv chartered surveyors
