Banking (May 2011)

Provided by Credit Today

Cash has been king for individuals and businesses for a while now. But those with cash and a clean credit record are probably sitting more comfortably than ever.

In an age where the banking sector is establishing the architecture of what regulators are calling ‘the new normal’, ensuring that they lend responsibly, and reviving critical funding sources such as the securities markets, those hoarding a stash of cash and a steady job are probably feeling quite smug. They can afford the hefty deposits required for a competitive mortgage rate, they form the customer profile that the banks are chasing, and they’re not all blighted by the turmoil of the past two years.

*For other consumers or would-be first-time buyers, there is a far less palatable new reality. While there are swathes of the British public who still demand cheap and widely available credit, thereby helping those on lower incomes and
impaired credit records to reach their aspirations, a back-to-basics style of more prudent banking has been gradually
emerging.*

New lending decisions are and will be carried out under more onerous regulatory and capital constraints. While banks will always have to hit their lending targets, particularly in an environment where Project Merlin exists, they are doing so under an unprecedented set of restrictions. It all appears to forecast a state of affairs that cannot look anything like 2007, a year in which gross mortgage lending hit £362bn. And why should it?

*As the banks have all learnt, some forms of lending in the boom years, including self-cert sub-prime, became a byword for fraud and an exercise in value destruction. While some consumers might be excluded from financial products as a
result, there are signs that attitudes to consumer debt are changing.* Recent Bank of England figures showed that
borrowers have reduced their mortgage borrowing by £24bn in 2011.

For businesses, weak trading activity across the economy is stifling their appetite to borrow to expand. Most have
been managing their cash flow carefully, repaying debt and reducing their operating costs. In fact, uncertainty about future prospects for the economy is a significant factor behind discouraging demand among businesses for new credit lines.

What both businesses and individuals face is a more prudent, conservative, and sensible style of banking – but not without the exclusion of certain consumers. After the 1990s recession, lenders found a way to provide products for the financially excluded – hence the proliferation of sub-prime. They’ll now need a less risky solution.

This supplement examines the issues facing thosein the banking, credit and lending profession and makes for invaluable reading for practitioners.

Credit Today would like to thank Lowell for sponsoring this supplement.

 

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