Tough times for the world of lending, tougher times for Britain

August 4th, 2008

We are now one year into the global credit crunch, which most commentators thought was going to be sharp, but short. However, it is proving far from the short-lived shock that some had hoped for, and it is still far from being done. Several of the key factors for the length of the crisis were starkly set out by the International Monetary Fund (IMF) last week in an interim update on its twice-yearly Global Financial Stability Report. First, and crucially, the IMF underlined the prospect of a further wave of serious losses for banks lending in the United States as the American housing slump continues to deepen.The IMF’s analysis points to the danger of a vicious downward spiral taking hold in the US, where new losses for banks lead to still tighter lending conditions, further sapping economic growth, plunging more companies and households into financial distress, leading to more defaults on loans, still deeper bank losses and further legs downward.

Secondly, huge uncertainties over the scale of the eventual losses facing banks in the US and elsewhere is inducing an ultra-cautious approach, leading them to pull down the shutters on would-be borrowers and insulate themselves against exposure to the toll on rival institutions.

A third issue is that, after banks on both sides of the Atlantic overstretched themselves by lending too much at too high a risk, they are continuing to struggle to raise the extra capital they need to rebuild their financial strength.

Yet with investors fearful over new losses, the banks’ falling share prices make new equity finance hard to come by. With still more turbulence ahead, institutions are left with little option but to rein in lending to safeguard their existing capital.

There are also several issues effecting Britain specifically, such as the relatively large scale of the financial hit still being shouldered by UK banks and the increased funding costs they face; the banks’ greatly increased reliance since 2000 on now scarce finance raised in wholesale markets to back mortgage lending; and the greater reliance on bank finance by a heavily indebted British corporate sector. The repercussions are clear from the drastic slump of more than two thirds in the numbers of new home loans now being agreed each month, personal loans have also taken a battering.

All of this demonstrates that the credit crunch in Britain remains intense and is aggravating an already acute danger of recession. With inflation acting as the second arm of a pincer movement the Bank of England finds itself in a very tight spot indeed.

This entry was posted on Monday, August 4th, 2008 at 3:18 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply

Click here to cancel reply.

Name (required)

Mail (will not be published) (required)

Website