Is the banking system still in crisis?
9th October 2015
I wrote back in July that it was seemingly likely that interest rates would go up either by the end of this year or early 2016. It now appears that the markets are not expecting a rate for another year possibly (I believe this was the same last year and the year before). When you also consider that the banks are still being accused of not lending enough, it would appear that despite the rhetoric coming from Westminster, very little seems to have changed in the last few years.
We’ve had the PPI scandal and now IRHP (Interest Rate Hedging Products) is the next big thing with some estimating the liability to the banking sector could be some £60bn. We’ve has some banks accused of money laundering and others having to conduct reviews into their own conduct (GRG). The one bit of good news is that the government is progressing the re-privatisation of Lloyds and RBS. Are things really looking up, or are we not far from where we were in 2008?
If you cast your minds back to those crazy days, the big thing was CDOs (Collateralized Debt Obligations) where subprime mortgages (predominantly US) were packaged with some credit insurance, sprinkled with a bit of magic dust, and then sold on to the markets as AAA-rated debt by the tens of billions of dollars (one of my non –financial friends once asked me to explain how CDOs worked and after some considerable time, I got exasperated and said “It’s the financial equivalent of polishing a turd” – as it transpires, a crude yet not inaccurate analogy). They were then re-packaged and re-sold so many times, not even the boffins had any idea what they had and what is was REALLY worth. As long as the housing market in the US continued to rise, there seemed no end in sight to this gravy train – after all, what could go wrong with AAA-rated debt? Then the bubble burst.
Seemingly overnight, the financial markets ground to a halt. The music had stopped and everyone has to see what they were holding, and it wasn’t pretty. Big decisions had to be made quickly, and not all were good (for example, the very fact that it looks like the Lehman creditors are going to get all their money back indicates Lehman was never insolvent in the first place – yet by allowing it to collapse, the shockwaves in the financial markets are still being felt to this day). Governments panicked and decided to print money like the world was about to end and gave it the official sounding title of “Quantitative Easing” to make it sound like they knew what they were doing – the problem was is that the banks were not facing a liquidity crisis, but a capital crisis – they didn’t need to lend more, but actually call in some of the debt that was already out there in order to bolster their balance sheets.
So, let’s move forward to today and my question of whether the industry remains in crisis. I think great strides have been made, but there is still a very long way to go. I believe the banks are still not where they should be in terms of lending, and I think that this is indicative that there are still serious issues with their capital base.
With far tighter regulation (new Basel rules for capital adequacy and the Financial Conduct Authority keen to be seen to be effective), banks have found themselves restricted and with little room to manoeuvre other than exercise forbearance on non-performing loans (as an example, Lloyds Banking group reported that as at 31st December 2014, they had £6.3bn of mortgages that were in arrears for over three months – excluding repossessions). There is also an unknown number of potential personal insolvencies (be it IVA or bankruptcy) hidden in the vast number of Debt Managements Plans that are currently active. Insolvency numbers are currently at a record low, but for how much longer? Vast sums tied up in non-performing loans are a bit like an open wound on the economy – it needs to be cauterised before it can heal. In other words, these debts need to be realised in order to recycle the capital back into performing loans which will result in greater economic growth.
So have the banks done anything wrong? The FCA themselves have faced criticism from the Treasury Select Committee for the way in which they are continuing to target the banks with big fines. Having said that, the fact there have been so comparatively few prosecutions would seem to indicate that the banks (by and large) were in fact complying with the regulations at the time. The fact that the FCA and PRA have now taken over from the FSA in banking regulation would seem to support the view that there was a historic problem with the regulation (with tighter regulation, all banks have to act in a similar fashion so that when one goes down, they all do). It’s not the purpose of this article to conduct a post-mortem of regulatory failures – perhaps that’s a subject for another time…
The $64,000 question is how do we correct this issue? I believe that the non-performing loan books need to be addressed as a matter of urgency. I believe that with care and consideration, the bankers and regulators can work together to realise these debts in a controlled, fair, and sustainable manner. If they wait for interest rates to go up, even a 25 basis point increase could push things out of their control (voluntary repossessions etc) and we’re back to where we started. The time for navel gazing is over unfortunately – it’s now time to make the tough calls.
A New Dawn for Personal Bankruptcy?
1st October 2015
You may or may not be aware, but as of the 1st October 2015, the minimum debt level required to go bankrupt has been increased from £750 (where it had been since the introduction of the 1986 Insolvency Act) to £5,000. There are those that argue that with the cumulative effect of inflation, the bankruptcy threshold did need to rise significantly to bring it in line with the spirit of the original legislation – however, £750 in 1986 would probably be a little over £2,000 in today’s money. So why the increase over and above a correction for inflation and what does this mean for those struggling with unmanageable debt, and what are the implications for creditors trying recover outstanding debts?
In April 2009, Debt Relief Orders (DRO) came into force for those struggling with lower levels of unmanageable debt (the maximum level of debt you can have under a DRO has recently been increased to £20,000, but there are strict criteria in respect of disposable income and assets – see here for more information). A DRO is to all intents and purposes “bankruptcy light” whereby court involvement is bypassed and as a result, the fees due by the debtor are significantly reduced. It would therefore appear that anyone considering petitioning for their own bankruptcy would in all likelihood be relatively unaffected by this change.
It is a very different situation for creditors looking to recover outstanding debts. The threat of bankruptcy by way of issuing a Statutory Demand has long been an invaluable tool in the armoury of the debt recovery industry. Giving someone 21 days to pay a debt in full or face bankruptcy proceedings is often highly effective when dealing with uncooperative or elusive debtors.
We always make it quite clear to clients that creditors are under no obligation to “do a deal” and will in some cases refuse a settlement and move to bankruptcy in the full knowledge that they will get nothing. The reasoning for this is quite straightforward – it sends a strong message to the market that if you do borrow money and don’t pay it back, the consequences can be severe (let’s face it, if a bank developed a reputation for always “doing a deal”, it wouldn’t be too long before everyone would jump on the bandwagon and attempt to negotiate a settlement even if they could afford to pay in full – the result being that the bank wouldn’t stay in business for very long).
Needless to say, the debt recovery industry is concerned that the dramatic rise in the threshold for bankruptcy will dent their ability to recover lower level debts. To play devil’s advocate if I may, I would like to see some data to see how cost effective bankruptcy is when dealing with debts in the £750 to £5,000 range given the legal fees etc involved.
So, why such a big increase given that it is well beyond any correction for inflation? Some industry lobbyists did recognise a need for an increase and seemed to agree that £3,000 would be a more appropriate figure. Perhaps the powers that be want to wait another 30 years before looking at this issue again? Maybe there are some new regulations in the pipeline to provide creditors more debt recovery tools? Possibly, it is a further incentive to tighten up risk assessment even further when looking at providing credit – having said that, I believe great improvements have been made in this area since 2008 and the last thing we need to do is to limit the provision of credit by banks etc even further as that will have a direct impact on economic growth.
Like most changes in legislation, I guess we will all just have to play the waiting game and see how things develop over the coming months. I am again reminded of the ancient Chinese curse “may you live in interesting times”….