Wednesday 1st October 2008
by Bob Bardsley
Know Your Money Editor
Government proposals to nationalise Bradford & Bingley have been suggested as potentially exposing consumers to the outstanding debt owed by the financial services provider, with knock-on effects throughout the banking and lending industries. The recommendations came from the Treasury following the revelation that Bradford & Bingley had failed to comply with its regulatory requirements. In order to protect customers of the organisation, the government proposed to transfer its product portfolio and client base to fellow financial institution Abbey, while absorbing some of the institution's debts into the Financial Services Compensation Scheme (FSCS).
However, a number of the issues relating to the proposed transfer have drawn criticism, both from those within the financial services industry and from opposition political parties critiquing the Labour administration's handling of the current credit crisis. Commentators have identified a number of ways in which members of the public might ultimately be held communally accountable for the failure of Bradford & Bingley, as well as noting some immediate effects which have emerged across the mortgage sector and more long-term trends in other lending areas.
The FSCS
The FSCS exists to protect consumers against the risk of losing their deposits should a bank fail. It typically pays out up to £35,000 per institution to customers whose accounts are lost due to financial irregularities. However, the Association of Mortgage Intermediaries (AMI) has pointed out that the Treasury's plan to amalgamate Bradford & Bingley's debt into the scheme in the form of a loan from the Bank of England could put it under considerable strain.
According to the Treasury, the first repayment due on the loan will be in September 2009 and is expected to stand at around £450 million. But the AMI estimates the interest on the loan - set at 30 basis points above the London interbank lending rate - could reach £1.8 billion per year. This compares with total contributions to the FSCS from the main financial services providers of £2 billion a year. With almost the entire fund dedicated to servicing the Bradford & Bingley loan, the AMI contends that peripheral services such as mortgage brokers, insurers and independent financial advisers could be expected to help meet and surplus needed elsewhere. "The ultimate cost will be borne by the market - and so the implicit impact on consumers must be carefully monitored over coming months," the organisation comments.
No room at the B&B
With the demise of Bradford & Bingley - and the subsequent withdrawal of its mortgage portfolio from the market - the range of products available to homebuyers and remortgagers has shrunk even more, as financial market information resource Moneyfacts recently noted. Terming September 29th "Black Monday", the analyst reported one of the greatest reductions in the number of available mortgage packages ever to occur in the space of 24 hours. Some 11.4 per cent of deals disappeared, according to the resource, including the entire Bradford & Bingley range and a number of products from Halifax and Bank of Scotland - which were recently bought out by Lloyds TSB.
In all, 445 different deals vanished from the financial services marketplace between September 29th and 30th, taking the number of residential mortgages from 3,252 to 2,988 and the selection of buy-to-let packages from 662 to 481. Moneyfacts suggested that the trend may also spread to other areas of the industry - such as loans or overdrafts - further tightening the availability of credit to members of the public throughout the UK.
Nursing the hangover
So what lies ahead in the financial markets? Vince Cable, Treasury spokesperson for the Liberal Democrats, recently likened the Bradford & Bingley situation to a blister waiting to burst. "The Bradford & Bingley boil must be lanced now," he asserted, adding: "The Bush administration has already had to nationalise mortgage lending and it looks as though a similar prospect is staring us in the face." Even with swift intervention from the tripartite authorities and the government, however, some economists claim that the credit crunch is still gathering pace.
Paul Niven, head of asset allocation at F&C Investments, argues that the credit crunch has become a "financial maelstrom" with effects spreading from Wall Street to Europe - and likely to result in low consumer demand for credit in the coming months. He explains that, with assets falling in value and incomes under increasing threat, few members of the public are expected to have much of an appetite for increasing their debt. "The hangover from the banking crisis will be long lasting and profound," he concludes.
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