大象传媒

A very sorry banker

• Robert Peston
• 20 Nov 08, 05:55 PM

It's very rare indeed for a bastion of Britain's corporate establishment to say sorry about anything - let alone say it in a public meeting.

So Sir Tom Mckillop's big sorry to shareholders, customers and employees is a proper event.

Royal Bank has much to be sorry for.

The bank expects to make losses this year. There's a 拢20bn hole in its balance sheet, which is being filled by capital provided by taxpayers.

It doesn't get much worse - although there's evidence today that for Britain's banks, we're a long way from the end of the bad news.

A part of Northern Rock, called Granite - which packages up mortgages and sells them to investors as bonds - has disclosed that mortgage customers are 90 days or more behind with the payments on more than 2% of 拢35.5bn of mortgages.

That compares with less than 0.5 per cent of mortgages that were 90 days in arrears in mid 2007.

To translate, it means borrowers are in some difficulty on more than 拢700m of mortgages.

The Rock disclosed this serious worsening in mortgage arrears when also announcing that in effect it will be winding down Granite - which was the vehicle which financed the Rock's rapid growth over many years.

The demise of Granite is a setback for any recovery in the mortgage-backed securities market.

Such a recovery was always something of an elusive hope.

But if banks can't find any way to raise money for mortgages from wholesale markets, it means Britain's housebuyers will remain starved of loans for some time yet.

• Permalink
• Comments (0)

Can Darling kickstart lending?

• Robert Peston
• 20 Nov 08, 08:39 AM

It's clear from comments posted on my blog that there's a widespread misunderstanding about what the massive taxpayer bailout of our banks was designed to achieve or could achieve.

The primary motive of the 拢400bn of additional taxpayer support provided last month by the Treasury was to prevent the collapse of the banking system (and really it wasn't such a bad thing to prevent a meltdown of most of our banks).

Or to put it more bluntly, the transfer to our banks of so much of our cash wasn't designed to kickstart lending by our banks - although it's unsurprising that many of you think that's what it was all about, because ministers created that impression.

The chancellor stipulated that recipients of the capital element of the bailout funds - of which 拢37bn has been drawn down so far - should maintain "over the next three years the availability and active marketing of competitively priced lending to homeowners and to small businesses at 2007 levels."

Which sounded very macho. And was politically necessary, because of a public sense of outrage that the banks should be propped up and yet give little back in return.

But what does "the availability and active marketing of competitively priced lending to homeowners and to small businesses at 2007 levels" actually mean?

It certainly doesn't mean lending at the same margin over the Bank of England's policy rate or Bank Rate, because for both mortgages and small-business loans that margin has soared - to reflect the increased risks of lending when the economy is shrinking and when many more businesses and individuals are financially stretched.

Obviously I can bore for hours about how mortgage providers are earning considerably more from providing scarce homeloans than they were only a few months ago.

But the only fact that you need to know about mortgages is that well over 50% of lending capacity in the mortgage market has been taken out by the problems at HBOS, the collapse of Bradford & Bingley and Northern Rock, and a freeze on new lending by small building societies.

The Treasury can shout all it wants to the recipients of capital from taxpayers that they must provide more loans to homeowners, but these recipients simply don't have the resources to fill the gap.

Which is why the pre-Budget Report on Monday is certain to contain measures designed to increase the flow of funds to our banks for transmission to homebuyers and homeowners in the form of mortgages.

Whether we like it or not, yet more taxpayers' money is bound to be thrown at reviving the mortgage market.

As for what's going on in lending to companies, the Bank of England's summary of business conditions, as prepared by its network of agents, blew the whistle on that yesterday. It said:

"Contacts reported a tightening in their own credit conditions since September. The all-in cost of finance had increased as set-up and management fees were raised and loans were increasingly priced relative to Libor rather than Bank Rate. Some contacts expected future cutbacks in facilities".

Or to put it another way, credit for business has become harder to obtain and more expensive.

Against that backdrop, the chancellor is considering giving increased taxpayer support to small business lending. As this morning's FT says, this is likely to involve an extension of a scheme that currently provides public-sector insurance (in effect) for 75% of the principal on some kinds of small-business loans.

The current scheme is tiny: it represents just 6% of all small-business lending of just under 拢6bn. So it would have to be massively expanded to yield serious benefits.

But this obsession with supporting small business may be a distraction from where the real weakness lies in corporate UK.

It's plainly important that as many small businesses as possible survive the current downturn, since they represent the future of the British economy.

However, they are not particularly indebted.

Many of them, very sensibly, have accumulated very substantial cash deposits.

On a net aggregated basis, small British businesses have zero debt. They are, to a great extent, well placed to survive our current economic woes.

Which cannot be said, I'm afraid, of all our bigger companies.

Our non-financial companies' gross debt is equivalent to 120% of our annual economic output. And much of that debt is concentrated in big companies in the sectors most damaged by the shrinkage of the economy.

From housebuilders, to national estate-agency chains, to construction groups, to property investors, to retailers, to restaurant and pub chains, indebtedness is at worryingly high levels.

The possibility that Woolworth could sell its entire chain of 800 stores for 拢1 and the collapse yesterday in the share price of the electrical retailer DSG are symptoms of a wider problem.

To repeat, the credit crisis is most acute for big British companies, not for small ones.

In the US, the Federal Reserve has thrown a $1800bn lifeline to substantial American companies, by agreeing to buy up their commercial paper. In effect, the US central bank is lending to them for up to nine months.

Our economy has huge structural similarities with that of the US. Draw your own conclusions.

• Permalink
• Comments (0)