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The Masked Tulip

Mortgage Rates Set To Rise As Lenders Struggle To Cover Cost Of Bank Victims Scheme

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http://www.dailymail.co.uk/news/article-11...ims-scheme.html

Six out of 10 building societies think they will have to raise their mortgage rates to cover the cost of compensating savers of failed banks, research showed today.

The majority of building society chief executives said the levy they had to pay to the Financial Services Compensation Scheme (FSCS) would have a "considerable impact" on their business.

Around 60% said they may have to raise their mortgage rates to offset the cost, while 53% said their savings rates may have to fall.

The FSCS pays redress to people who lose money when a financial institution collapses, and it has recently compensated savers of internet bank Icesave, Kaupthing Singer and Friedlander and Bradford and Bingley.

But building societies argue that the scheme, which is funded through a levy on all financial institutions, is unfair as the levy is based on the level of consumer funds institutions hold, rather than their risk of collapsing.

Great, screw the prudent again.

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I'd love to see the terms of the loan to Iceland so they could repay UK savers.

I doubt we'll see any money being paid back for a long time .......

In the meantime, the next big bill will be the billions the government will have to shell out under the bank indemnity scheme once the banks have taken their share of uninsured losses.

With mortgage arrears exploding this could happen much sooner than expected.

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It goes on and on and on doesn't it, one article after another that seems to confirm that mortgage lending will remain tight for a long long time.

A few weeks ago we had the article about councils etc withdrawing funds from lenders due to the Moody's downgrades :

Mutuals are no longer as safe as houses

Britiain's building societies face up to the prospect of losing capital as a result of changed credit status and must adjust to the new reality

...........I believe the problems at the Dunfermline will soon be mirrored by similar difficulties at societies... No other society can swallow other bad balance sheets whole, so in future there will be no mergers ... taxpayers will take the strain of ensuring the survival of the building society movement.”

To ensure those survive, the Treasury is planning some form of lifeboat to help societies rebuild capital. The Budget Red Book hints at the plans, saying the Government is taking “actions relating to the development and design of capital instruments and the potential for shared services between mutuals

Despite being skewed towards more secure retail deposits, 30pc of the sector’s funding – or around £100bn – comes from institutions, who may think twice following the Moody’s downgrade, and the wholesale markets, which remain effectively closed. Without funding, mortgage lending will dry up. “To the extent that funding is restricted, it will restrict our ability to lend,” Nationwide chief executive Graham Beale told the TSC. The BSA’s Adrian Coles reckons “it is quite conceivable that lending will fall this year” as funding evaporates. ......

.......With rates at almost zero, savers are moving their money into different investments and societies suffered overall

Then we were asked :"Should we save the building societies":

........ the FSA is in the process of verifying whether all societies - not just the Moody's seven - have the capital to cope with further strains in the housing market and whether they have sufficient access to finance to withstand a prolonged drought of wholesale funding.

Societies unable to demonstrate they can absorb potential future losses comfortably will not be allowed by the FSA to retain their independence - unless the Treasury were to invest in them on taxpayers' behalf (not impossible).

As for those with adequate capital but inadequate access to deposits and wholesale finance, their future hinges on whether the Treasury and Bank of England relax their conditions for providing taxpayer loans and guarantees.

"Their future hinges", on being bailed out, so either way, if they can't absorb losses they need to be bailed out, and if they can absorb losses their future still depends on being bailed out! However, the question I keep asking is, "can the government afford to bail out the building socieites AND given them enough money to lend? After all the government have bailed out the banks but the BOE is still saying the banks cannot afford to lend when it is SO risky to do so :

The Bank of England is concerned that the UK's banking system is heading for a third wave of crisis that could snuff out fragile signs of recovery in the economy.........

......Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.

The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.....

The Government must consider pumping more cash into struggling British banks and conceivably nationalise more of them, or consign itself to years of insipid growth, the Bank of England Governor has warned

Mervyn King said although banks' survival had been assured by recent bail-outs, they would not start lending freely unless more capital was pumped into their balance sheets.

Mr King said: "There is a big difference in practice between the levels of capital banks need to be stabilised... and those required to persuade banks to exhibit normal levels of risk-aversion. How big that gap is is impossible to say... but it looks as if it will be quite big.

If the banks are going to continue as private sector entities they will naturally behave in a risk-averse way for a while... [The state] could put in more public sector capital but that has ramifications for the Governments' shareholdings in banks."

It doesn't sound good does it? The mortgage market financed up to nearly 2/3rds by the RMBS market pre crash now dependant it would seem ONLY on the government. But how realistic is it for the government to provide ALL these institutions with enough to stop them going under AND TO LEND?

And now the article related to this thread:

Around 60% said they may have to raise their mortgage rates to offset the cost, while 53% said their savings rates may have to fall.

Neither option sounds GREAT does it when they are already having problems lending and when lending is dependant on deposits ,

lowering savings rates is not good either is it?

Yesterday the IMF said:

More banks may have to be nationalised

Alistair Darling must stand ready to pump more capital into Britain's beleaguered banks, perhaps nationalising other high street names, the International Monetary Fund has warned.

The Fund believes that although the drastic measures to prop up Royal Bank of Scotland, Lloyds Banking Group and other major lenders had prevented them from collapse, more public money needs to be poured in if the economy is to get back to full strength. The alternative is a "zombie" recovery as banks continue to withhold lending for years, the IMF has told the Treasury. .....

......The Fund's concluding statement, following a week-long visit to the UK, said; "The financial system may not yet be repaired to a level where banks are ready to increase lending sufficiently to underpin a strong recovery. Although banks are expected to continue to remain above minimum regulatory capital requirements, further shocks will lead to an erosion of capital buffers."

It added that the Government must encourage banks to raise more capital, and to "stand ready to provide further public support where needed."

But how can the government do ALL of this when there are already Q's about how they will raise the £220bn needed this year before ALL the above was spoken about? If we were going to be paying until 2032 on March predictions how long are we going to be paying if we have to pay for ALL the above? It can't happen can it, in all honesty it can't happen, so what will happen?

Edited by Sybil13

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