Last week, the Treasury released a White Paper on the future of banking regulation. Among other proposals, it detailed new powers for the FSA as well as demanding more capital and liquidity buffers for lenders. Last Wednesday, City minister Lord Myners told a Treasury select committee meeting that the paper also addressed the core problems of funding deficits in the mortgage market.
Myners said the White Paper should create new internal capital structures to encourage greater conf- idence in financial markets and help credit markets back on to their feet.
He said: “The ability for banks to lend depends on their capital and their access to deposits.”
But critics have argued that too many questions still hang over the banking sector’s ability to create credit – they say a lack of funding and a lack of competition in the mortgage market were not addressed in the paper. Labour MP for Newcastle upon Tyne central Jim Cousins replied to Myners at the same TSC meeting: “Unless we get lending going, we are going to be in this state of difficulty for many years to come.
“Financial institutions are against a background where securitisation has as good as stopped and foreign lending has as good as stopped and new lending has as good as stopped – how are we going to get the competition that will drive the economy forward through all this?”
Association of Mortgage Intermediaries director Robert Sinclair agrees with Cousins. He warns that consumers need more competition among lenders and greater lend-ing levels overall.
Sinclair says: “The consolidation of the market and Government intervention has led to the creation of four banking groups which control around 80 per cent of the current account market and six groups who are responsible for around 90 per cent of mortgages written.
“This concentration, under any economic definition, is a major restriction on competition and is ultimately bad news for consumers. We need to see an increase in the number of lenders or at least increased levels of lending among those in the market. Without this, consumers, and particularly first-time buyers will find it increasingly difficult to enter the housing market, which would stifle a recovery.”
Moneysupermarket.com head of mortgages Louise Cuming says the White Paper signals more regulatory intervention and less freedom, which she thinks is only a bad thing for lending.
She says: “This White Paper will not address the problem of competition in the market. It is hard to see how this will make things any better.
Cuming points out that the lack of competition in the market stems from mortgage lenders’ over-cautious attitudes towards lending. She says: “This paper’s thrust is towards more caution – surely the mortgage market cannot be even more careful? The risk pendulum has already swung too far in one direction.”
Banks are erring towards caution because they have to rebuild their balance sheets, Royal London Asset Management head of equities Jane Coffey says there is still a massive imbalance between deposits and debt on banks’ books that must be solved before funding can return to normal and a healthy market can prevail.
She says: “The problem is the White Paper has not answered all the questions. Although it allayed fears that a bank could be allowed to become too big to fail, it did not outline radical enough steps to solve the banks’ biggest problems.”
Coffey says too many questions still hang over precisely how much capital the banks have to hold to lend as well as how much they are allowed to leverage their balance sheets. She says a bank such as Barclays has a book that is currently leveraged at around 70 times its worth but speculation in the market is that the FSA may want the banks to be leveraged at just 35 times.
She says: “There is still a real issue out there as to how banks can deleverage their books without leading to an even greater loan crunch – if the market is right then we have a long way to go before banks can begin lending at normal levels.”
The Council of Mortgage Lenders says the banking White Paper is aimed at too many over-arching issues to solve the problems of the mortgage industry now and says the sector will have to wait until September’s mortgage White Paper for answers. A spokesman says: “This White Paper will not address the funding issues, which are one of the most acute problems that we face right now.”
Brentchase Financial managing director Mike Fitzgerald says even though the mortgage industry will have to wait until September for more clarity, it should not expect what follows to be the cure of all ills.
He says: “People think that more regulation will solve the problems but we have had regulation for a while now and things have not been solved.”