Barking about ringfence bite
Ringfencing the retail operations of the UK’s biggest banks could make mortgages more expensive but brokers feel firewalls should be in place.
On September 12, the Independent Commission on Banking, led by Sir John Vickers, is expected to recommend that banks should ringfence their retail arms.
The proposal has the support of the Govern-ment, with Chancellor George Osborne endorsing the plan, albeit over a more drawn-out timescale than Business Secretary Vince Cable.
But the Confederation of British Industry recently became the latest body to express its concern at the proposals, with director general John Cridland saying the Government would be “barking mad” to ringfence retail operations in the current economic climate.
The British Bankers’ Association has fervently opposed ringfencing, arguing it could raise the cost of lending.
BBA chief executive Angela Knight said: “The City is not alone in calling for urgent consideration to be given to the costs and consequences of regulatory change in the banking sector. This is not an abstract discussion and it does not simply affect the banks.
“Whatever the conclusions of the Independent Commission on Banking, there is general agreement that they will be significantly costly and have an impact on lending.”
There are several factors working in favour of borrowers at present despite lenders’ strict criteria and the relatively low number of higher loan-to-value products on the market.
Over the past few months, lenders have cut residential mortgage rates significantly and, according to a report published by Halifax last month, the cost of buying a home is now £100 cheaper a month than renting an equivalent property.
Some brokers say the introduction of ringfencing could derail a lot of the recent rate reductions and cause lenders to stop chasing mortgage business.
A research note from Citigroup’s UK banking team, published last week, says recent stockmarket volatility has seen Barclays, Lloyds and Royal Bank of Scotland’s combined market value halve. It says the underperformance of UK banks represents around £20bn-25bn and estimates the ICB is responsible for £10bn of this.
Prolific Mortgage Finance managing director Lea Karasavvas believes banks may increase mortgage costs to borrowers to cover these losses.
He says: “This will have to be recouped somewhere and one suspects it will result in higher borrowing costs for the consumer.
“With the cost of borrowing dropping so considerably in the last few months, this will have serious implications on banks’ lending targets, which are already significantly lower than expected, and could nullify all the hard work put in by lenders over the last few months to increase borrowing.”
Lentune Mortgage Consultancy director Stuart Gregory says the proposal could destabilise the banking sector at a time when it is starting to steady and says the proposals should be watered down.
He says: “Banks have got to be given a certain amount of leeway so they have the flexibility to improve their offering for borrowers. The last thing the sector needs is tons of onerous conditions being thrown at it, just when it seem to be improving.”
While acknowledging that the proposal might push up borrowing costs, Knight Frank Finance managing partner Simon Gammon says implementing ringfencing might be necessary.
He says: “There will be some impact on all areas of banks’ charges and it could be an option for banks to recoup some of their costs through the retail mortgage sector.
“But perhaps history tells us that we cannot rely on banks to be in control of themselves and these restrictions need to be introduced.”
Some brokers think the ICB’s proposals will have a positive impact on the mortgage market.
Your Mortgage Decisions director Martin Wad feels lending will not be adversely affected as long as banks’ retail operations are able to borrow and raise funds on the wholesale markets.
He says: “I think this will allow banks to stabilise the costs of mortgages. I cannot seeing it being negative for our industry. As long as banks still retain the ability to borrow funds and securitise funds for lending so they have sufficient money, I think it will be a positive move.”
Wade says banks’ investment arms could have held back their retail divisions in the past.
He says: “The danger is that when the investment bank makes a lot of money, it is paid away in bonuses. When it loses a lot of money, it looks to other parts of the bank for help, so the retail side almost gets the worst of both worlds.”
The investment arms of the major banks have been heavily criticised in the past for their “casino” approach to risk. For this reason, Capital Fortune managing director Rob Killeen says ringfencing is vital to ensure further market volatility is avoided.
He says: “The fragility of the current economy is a direct result of having no appropriate firewalls, yet banks and now the CBI are seeking to justify the current fragility as reason not to implement change rather than the fundamental reason for reform.
“Banks run the risk of planting the very seeds of the next financial crisis unless their operations are separated.”