Tony Ward is chief executive of Homefunding
In addition to the various debates around the implementation of the Mortgage Market Review, the dissipation of interest-only loans and the merits of NewBuy schemes, there lurks a sinister spectre which in itself could have more impact on the mortgage world than anything else at present.
It’s been there for a while. In fact the original version (Basle I) may have very well driven the start of the credit crunch. This spectre is none other than Basle III and its implementation.
What does this mean? Well a whole range of things and I would be happy to take anyone through them in more detail. In fact I’m in the process of drafting an essay around the whole subject matter which I hope to publish shortly. However for the sake of this blog I’ll keep it brief. In a nutshell, banks will be required to hold considerably more capital and liquidity than they have previously.
Some are already addressing this through de-leveraging. Those of you who have read my previous articles and blogs will have seen me mention this before. Perhaps I was getting ahead of myself but it is certainly something that banks are picking up with a huge amount of fervour today in their bid to aggressively dump assets and cut back on lending.
On Wednesday the IMF forecast that a drastic contraction of European balance sheets during the next 18 months could jeopardise financial stability and economic growth in Europe and beyond. In its Global Financial Stability Report, the IMF warned that European banks looked set to shrink their balance sheets by $2.6 trillion (€2 trillion) over that period. It is suggested that a quarter of deleveraging will come from reductions in lending, alongside sales of securities and assets as banks try to shore up their finances.
The most worrying aspects of this activity are, of course, how it will affect the economy. There is a danger that this could go into an uncontrollable tailspin, threatening to drive Europe into a new vicious cycle in which business and households are deprived of credit. This will, in turn, depress the economy leading to more strains within the banking system. The International Monetary Fund has already said that credit supply in the euro area could shrink by 1.7% as European banks dump almost 7% of their assets by the end of 2013.
So restricting credit lines could have a significant impact on the economy – in particular house prices where borrowers, primarily first-time buyers even with NewBuy, have limited access to monies.
But almost bizarrely on top of this, you have the euro area and the City of London calling on banks to maintain the flow of lending to the economy on top of raising capital ratios.
So what’s a bank to do?
Well it certainly has to comply with Basle III and that means taking action. Deleveraging is certainly the watchword but how to do it profitably and without alienating your customer base is a fine art – one that some practise well, for example Bob Young at Capital Home Loans, but others may need a little help with.
At yesterday’s HSBC Great Housing Market Debate 2012 the mood was fairly sanguine about the prospects for recovery and house price rises. I’m not so optimistic given the global liquidity issues. I think we are getting ahead of ourselves a little. One thing’s for sure though, be prepared to see that term deleveraging around for some time to come.