By the time the real impact of the Government’s negligence is calculated, the UK will probably face the same fate as West Brom – relegation to the next division.
Within the UK, name one big, broadly domestic, well-thought-of financial institution? Why does it matter? Well, it matters to all of us who aspire to be in our industry over the next 10 years because we need to start thinking about what it will take in a future world to be taken seriously again. This implies the state no longer controlling any of these big institutions (or perhaps retaining a small equity stake) and therefore they rise or fall based on their own individual performance.
The problem is that governments cannot allow any more big banks to fail for fear of a systemic banking collapse So, back to the question. HSBC does not count because it is really a global player.
The problem lies in the bedrock answer of yesteryear. Halifax, Bank of Scotland, Royal Bank of Scotland, Northern Rock, Alliance & Leicester, Bradford & Bingley, Dunfermline, Derbyshire, Cheshire and so on. From the very big to the very small, each one was undermined by a weakness in their core competency – how to assess risk, in particular, credit risk.
As UK plc begins to emerge from this financial mess, the domestic survivors will need to continue to raise capital to repay the state and bolster capital adequacy ratios. It is almost irrelevant which institutions survive in what shape and, for example, whether a future Government would allow the Lloyds Banking Group to continue to have such market share.
The answer lies in how UK plc begins to gain the confidence of the global investor community again and, after the last Budget, do not underestimate just how far we have fallen in the global pecking order – “sell the UK” is the only order to be heard.
How will a future Northfax Binshire Bank persuade a global investor community to buy their first new mortgage-backed security issue or covered bond? Trust us, we have 150 years’ experience of underwriting mortgages?
Investors will demand an objective, third-party evaluation of that lender’s credentials. In the US, the biggest third-party assessor of mortgage credit, Claytons, is working hard with rating agencies and the US Treasury to draw up minimum requirements.
Lenders’ own credit teams are no longer trusted and it is time in the UK that we started following this particular lead. Clayton Euro Risk, as it is known in the UK, is the only “due diligence” business here that satisfies the most onerous regulatory requirements. It has “re-underwritten” over £20bn of mortgages over the last two years, which is over 90 per cent of the total market.
In a future world, UK plc will need investors back – it is the only way we will ever recover in the long run. What will they want? That should be a major focus and lenders today who believe they will be around over the next year or two should start their own rolling programme of due diligence on their mortgage assets now if they have any desire to tap into the debt market when it reopens.
Michael Bolton is former chief executive of Edeus