The Government steps in to stimulate bank lending to small companies

November 29th, 2008

The Chancellor of the Exchequer, Alistair Darling, is apparently drawing up measures to boost lending to business, amid warnings that banks risk the ultimate sanction of full nationalisation unless they reopen credit lines to struggling companies.

Mr Darling wants new regulations to force banks to give companies more notice of changes in lending practice, including withdrawal of credit lines or sharp changes in interest rates. He is also looking at ways to extend government guarantees to support new business lending, building on existing proposals designed to release funds for new home loans.

Separately Mr Darling wants to clarify capital adequacy rules to make it clear that newly recapitalised banks do not need to sit on a fat cushion of capital and that regulators expect them to lend during the recession.

If these changes fail to reopen choked credit lines, Mr Darling has a range of fallback options, including the last resort of nationalising the whole banking sector.

Mervyn King, Bank of England governor, emphasised that threat, telling members of parliament: “I think, given what we have seen, it would be an extremely brave person that would rule anything out. It’s very unlikely to be the first option

Banks reject the suggestion that they have reined in lending in spite of the deteriorating economy. Lloyds TSB says its lending to small and medium-sized businesses is up by 18 per cent year-on-year.

Mr Darling this week ordered an inquiry to establish the full facts on business lending, but ministers are under increasing pressure from companies and the opposition Conservative party to take bold action.

Peter Mandelson, now the business secretary, weighed in to the debate saying, “It’s completely unacceptable to the government and to business in this country for banks indefinitely to stop functioning as banks. We are in very intensive discussions with the banks, believe me.”

Mr Darling must see the serious pitfalls in the most radical options available to him, including nationalising the banks, insuring all business loans or directly lending to companies. Bankers confirm that privately ministers are taking a measured approach to the problem.

In the first instance Mr Darling will probably use the Financial Services Authority and Office of Fair Trading to regulate and stamp out what he calls “bad practice” by banks in changing the terms of loans at short notice

He is also said to be looking at ways of extending government guarantees to bank debt to create a source of medium-term finance for new business loans, not just new mortgage lending.

Mervyn King recently told a parliamentary committee that banks are giving up profitable lending opportunities in order to behave defensively. He claims that, collectively, this is a recipe for a deep recession.

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Interest rates fall, but so does the pound

November 22nd, 2008

Those thinking of seeking a loan in the near future should take note. Expectations of another interest rate cut have risen after the release of minutes from the Bank of England meeting at which rates were lowered from 4.5% to 3%.

The Bank’s nine-member committee voted unanimously for the cut on 6 November, but considered a bigger one.

The Bank’s own calculations showed that a cut to 2.5%, or even lower, would be needed to stop inflation falling too far below its target next year. But the rate-setters decided such a big cut would come as too much of a shock.

The one-and-a-half percentage point cut they agreed on was the biggest reduction since 1981, and took rates to the lowest level since 1955.

Commentators believe that this confirms that we’re going to see more rate cuts from the Bank of England, and more aggressive rate cuts.

The minutes said that: “Some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened.”

There was also concern that if rates had been cut by any more, there could be too sharp a fall in the value of the pound, which would create inflationary problems.

In recent weeks the pound has fallen below $1.50 for the first time since 2002. The pound is also at its weakest level against the euro since the currency was created in 1999. Only twice in recent history has sterling fallen by such a degree. On 16 September 1992, the pound was withdrawn from the European Exchange Rate Mechanism, triggering a fall from around $2 to $1.40.

In addition, the committee’s members were worried that a bigger cut could be “misinterpreted” and that this could damage its credibility.

The Bank stressed that its decision was based on the government’s current tax and spending plans, which meant they would have to be reconsidered after the chancellor’s pre-Budget report, which will be published on Monday.

For those able to find a loan this will be good news, the interest rate falls will be passed on and you will repay less. In the current climate, however, this will be cold comfort to those who are unable to find a lender.

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PPI: The Saga Continues

November 15th, 2008

The Competition Commission has declared that payment protection insurance (PPI) should not be sold to a customer within 14 days of being sold a loan. Apparently the Commission is planning a crackdown after it estimated that £1.4bn of “excess profit” was made by the PPI in 2006.

For those who are unclear, PPI should ensure that people can still repay loans such as mortgages or credit card bills if their income falls when they lose their jobs or fall ill. However, PPI has been mis-sold in the past, with some customers unaware they were even buying it.

The sale of this insurance has been under sustained attack from consumer groups for the past three years, who have described it as little more than a “protection racket”.

The Commission has said that the vast majority of more than 13 million PPI policies in the UK were sold at the same time as a consumer would take out the loan or been given other credit. But at this point the banks, mortgage providers or credit card companies faced little or no competition, with consumers unaware they could buy PPI elsewhere.

This meant that the providers were able to charge high, even extortionate, prices.

The Commission said that the proposed 14-day window would allow customers to shop around for PPI. Customers would still be able to take the initiative and contact a loan company within 24 hours of getting a loan if they wanted PPI from that company.

It suggested that providers be offered a “personal PPI quote” that outlines the cost of taking out the insurance. It wants a ban on “single premium” policies which stop customers being able to switch, because it is, in effect, paid for upfront by adding it to the total debt.

There have also been calls for providers to make advertising clearer, to give information to the Financial Services Authority (FSA) for a comparison table and an annual report for customers helping to decide whether to switch.

However, unsurprisingly the Commission’s proposals have come under fire from groups representing providers.

“Preventing customers from buying PPI when they take out new credit will mean that many vulnerable people go unprotected just when unemployment is rising sharply,” said the director general of the Finance and Leasing Association.

He added that the loss of single-premium PPI would also result in “worse terms” for many customers. He warned that the proposals would raise the cost of credit, ignoring concerns about rising interest rates on credit cards.

The Association of British Insurers said the 14-day ban would leave “millions of consumers unprotected”. “By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong,” said the ABI.

The British Bankers’ Association said: “It is totally without conscience to encourage people to borrow without back-up. The Competition Commission has gone well beyond its remit.”

But independent PPI provider Paymentcare.co.uk, praised the Commission for the proposed ban on single-premium PPI policies, describing them as “a major obstruction” to consumers getting a fair deal. Which? believes up to two million people have rushed into buying PPI only to find that they could not claim on the policy, owing to exclusions in the small print.

The Financial Ombudsman Service (FOS) recently demanded that the FSA take action to stop banks fobbing off customers who had complained to them about PPI being mis-sold. It said this had led to it receiving a deluge of complaints from the public. The FOS is still getting 100 complaints a day, far and away the biggest source of grievances.

It is telling that independent organizations are praising this move by the Competiton Commission, while those with a vested interest in the continued abuse of the PPI system are critisising it. In my opinion this can only mean that the Commission is doing exactly the right thing.

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