Given the fact of huge state involvement, what sort of lending does the state want to see?
A suggested return to 2007 lending as part of the bailout conditions has proved controversial. It has already caused a stir among some commentators, with the CML asking for clarification. Summing things up, you might say simply “easier said than done”. For HBOS, in particular, this would make a very interesting challenge in today’s funding environment. Does that mean a return to funding levels when securitisation was still available?
I do think that securitisation is a good idea that needs regulating – that it is not in itself bad. But how exactly would HBOS – state- backed or not – bring it back single-handedly? Put simply, it won’t because it can’t.
It does seem there is risk of wanting things both ways. No to risky loans, yes to unrisky loans. But defining risk accurately in what will be a new financial world order is precisely the sort of risk it is almost impossible to assess.
Should HBOS, across all its brands, dip into all this wonderful new Government funding to reassert its place in the market? Lloyds TSB owns Cheltenham & Gloucester, was always quite conservative but even if it returned to its 2007 lending levels, it would represent a huge chunk of their 2008 market.
The RBS case is slightly more complex. It was arguably felled by the ABN deal that has proved costly in hindsight rather than by its overall funding model. Yet at one point, I recall there was even talk about emulating HBOS’s multi-brand strategy as it eyed HBOS’s mortgage market share with envy.
This is not uncharted territory for banking. It is completely off the map in a place “where be dragons”.
In the UK, we have two state-owned banks already – Northern Rock and Bradford & Bingley. The former might as well adopt the slogan “Northern Rock – in no hurry to lend” while the latter is surely being run down quietly. Internationally, there have been bank bailouts in the past and subsequent changes in regulation.
But, Sweden aside, even in an economy the size of Japan, the moves were arguably more local than global. So in the UK we come back to what the Government means. Money Marketing has already discussed online the sort of loan to value the Government means banks to return to. Is 100 per cent loan to value a reckless use of Government-backed cash? Is 90 per cent LTV? What about funding buy to let? And how does any bank finance director factor in assumptions about the value of property prices?
In the past, the theory would have been that funding, banking, lending and mortgage markets all interacted with a level of efficiency and awareness of market needs that the state could never hope to emulate – only the Soviet Union ever really tried. For all the dysfunction that has come to light in the last few years, some fundamentals about markets still apply. My instinct is that it is a lot easier and indeed justifiable for a state to stop the private sector doing things – don’t pay big bonuses – than to make them do things such as lend. There is clearly a danger with lending as a policy goal – like trying to force water down a blocked drain.
Of course, many of these questions may apply to business loans too. This does not mean I am saying that the bailout should not happen. With the Government standing behind banks, it may increase the number of players who will be lent to globally by the other banks and that helps everybody.
But in a world in which everything has changed, I just cannot quite see what rules state and part-owned state banks should play by. There was too much credit, now there is far too little. Getting back to a happy medium is a perilous task.