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Will Uk Banks Try To Lend Their Way Out Of The Crash?

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When the crash happens, many UK banks will be left with repossessed homes which are worth less than the mortgages they issued. This will mean many UK banks will be insolvent or close to insolvency. Will the UK banks continue to lend, hoping to kick-start a recovery or will they shut up shop and hope for the best like they have done in Japan?

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When the crash happens, many UK banks will be left with repossessed homes which are worth less than the mortgages they issued. This will mean many UK banks will be insolvent or close to insolvency. Will the UK banks continue to lend, hoping to kick-start a recovery or will they shut up shop and hope for the best like they have done in Japan?

Who to?

They are right at the edge of what they can give out and expect to see come back already. I suppose they can stick some on the 3:30 from doncaster or start doing dial a tramp loans but I can't see it working.

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My understanding of the situation in Japan (willing to be corrected) is that once the initial stages of the crash were over, demand for credit soon picked up. The restricting factor is not demand but the willingness of the Japanese banks to lend given that they already know that they are pretty much insolvent.

So long as people have "confidence" that prices are going to recover there will be plenty of punters, the problem being that the next crash will follow shortly after...

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My understanding of the situation in Japan (willing to be corrected) is that once the initial stages of the crash were over, demand for credit soon picked up. The restricting factor is not demand but the willingness of the Japanese banks to lend given that they already know that they are pretty much insolvent.

So long as people have "confidence" that prices are going to recover there will be plenty of punters, the problem being that the next crash will follow shortly after...

But banks don't lend to normal folks, they lend to each other. (In effect)

Almost every pound would wind up back in the banking system, just in a different account somewhere. While HSBC might give money to Mr. Jones, they are actually sending it accross the street to Halifax, and they aren't certain about the halifax, never mind Mr. Jones.

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But banks don't lend to normal folks, they lend to each other. (In effect)

Almost every pound would wind up back in the banking system, just in a different account somewhere. While HSBC might give money to Mr. Jones, they are actually sending it accross the street to Halifax, and they aren't certain about the halifax, never mind Mr. Jones.

They can learn to trust each other again. It's a beautiful thing

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Who to?

They are right at the edge of what they can give out and expect to see come back already. I suppose they can stick some on the 3:30 from doncaster or start doing dial a tramp loans but I can't see it working.

And who from?

I can't see pension funds queueing up to take more of the same shit they were lapping up 9 months ago, since it has proven to be a bad investment.

And the banks saying "It's different this time" probably won't wash either.

Edited by bobthe~

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And who from?

I can't see pension funds queueing up to take more of the same shit they were lapping up 9 months ago, since it has proven to be a bad investment.

And the banks saying "It's different this time" probably won't wash either.

even if the pension funds no longer like it, the banks may be willing to keep the risk themselves... :(

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When the crash happens, many UK banks will be left with repossessed homes which are worth less than the mortgages they issued. This will mean many UK banks will be insolvent or close to insolvency. Will the UK banks continue to lend, hoping to kick-start a recovery or will they shut up shop and hope for the best like they have done in Japan?

What?

I think you need to brush up on 'securitisation'.

Mortgage lenders only hold mortgages for 30-60 days before bundling them into securities and selling them.

So the big UK banks are not really exposed to falling UK property prices. They simply lose one source of cashflow from mortgage/MBS handling fees. Banks like RBS and HSBC will not even blink.

Banks where these handling fees constitute the entire business (like Northern Rock) are toast. Because nobody wants to buy any mortgage backed securities. Northern Rock is akin to a factory that manufactures lots of products that will no longer sell. A bit like Rover. They are borrowing money to keep afloat and will eventually drown. Its operating anaerobically, the longer it runs the heavier the burden.

Without buyers in the mortgage backed securities market there is literally no money to lend to mortgagees anyway. Our property prices are no longer supported by Asian banking deposits. And therefore neither is our equity.

Edited by ?...!

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My understanding of the situation in Japan (willing to be corrected) is that once the initial stages of the crash were over, demand for credit soon picked up. The restricting factor is not demand but the willingness of the Japanese banks to lend given that they already know that they are pretty much insolvent.

Interesting. My understanding of the Japanese stagnation (also willing to be corrected!) was a little different. With central bank interest rates at or close to 0% for so long, banks had essentially infinite incentive to make retail loans. It was not the supply-side but the demand-size that faltered - the Japanese people really just did not want to borrow. It took a long time to reverse those deflationary expectations - I mean, why borrow money for consumption when prices are falling?

I read an interesting paper about this not so long ago, entitled "Who killed the Japanese Money Multiplier?" I'll have to go dig it out and have another look, I think.

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My understanding of the situation in Japan (willing to be corrected) is that once the initial stages of the crash were over, demand for credit soon picked up. The restricting factor is not demand but the willingness of the Japanese banks to lend given that they already know that they are pretty much insolvent.

So long as people have "confidence" that prices are going to recover there will be plenty of punters, the problem being that the next crash will follow shortly after...

I don't have any figures but that's not my recollection of what happened in Japan.

After the real-estate and stock market crashes of 90' and 91' there was no kind of

recovery at all, in fact after the Kobe earthquake and Tokyo sarin attacks ,sentiment

changed for the worse (1995).

I think outstanding bank loans have continued to decline for the past 17 years, either

paid back or writen off.

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I think the real problem here was that most corporate lending was secured on property. Then, when property prices fell up to 80%, companies were massively indebted and began using free cashflow to pay off huge debts rather than invest and grow. Banks, meanwhile, with 100s of insolvent lenders, were weighed down with trillions of yen of bad loans and were unable/unwilling to lend. The BOJ kept slashing interest rates and the government poured pumped up spending but it still took years to turn it around. An economist he here I was chatting with said the problem was that most actors were reacting rationally in line with traditional economic theories but the problem was that the situation didn't fiit the theory.

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They can learn to trust each other again. It's a beautiful thing

...get real...would you trust a desperate lender anymore than a desperate borrower....when it turns to financial war trust evaporates and there are no winners ....except the vultures waiting in the corner to pick over the carcasses almost for free... :ph34r::ph34r::ph34r:

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What?

I think you need to brush up on 'securitisation'.

Mortgage lenders only hold mortgages for 30-60 days before bundling them into securities and selling them.

So the big UK banks are not really exposed to falling UK property prices. They simply lose one source of cashflow from mortgage/MBS handling fees. Banks like RBS and HSBC will not even blink.

Banks where these handling fees constitute the entire business (like Northern Rock) are toast. Because nobody wants to buy any mortgage backed securities. Northern Rock is akin to a factory that manufactures lots of products that will no longer sell. A bit like Rover. They are borrowing money to keep afloat and will eventually drown. Its operating anaerobically, the longer it runs the heavier the burden.

Without buyers in the mortgage backed securities market there is literally no money to lend to mortgagees anyway. Our property prices are no longer supported by Asian banking deposits. And therefore neither is our equity.

Securitization is a way of parcelling out risk.

It does not transfer the ownership of the mortgage which remains with the original lender who is still responsible for handling any defaults.

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What?

I think you need to brush up on 'securitisation'.

Mortgage lenders only hold mortgages for 30-60 days before bundling them into securities and selling them.

So the big UK banks are not really exposed to falling UK property prices. They simply lose one source of cashflow from mortgage/MBS handling fees. Banks like RBS and HSBC will not even blink.

Banks where these handling fees constitute the entire business (like Northern Rock) are toast. Because nobody wants to buy any mortgage backed securities. Northern Rock is akin to a factory that manufactures lots of products that will no longer sell. A bit like Rover. They are borrowing money to keep afloat and will eventually drown. Its operating anaerobically, the longer it runs the heavier the burden.

Without buyers in the mortgage backed securities market there is literally no money to lend to mortgagees anyway. Our property prices are no longer supported by Asian banking deposits. And therefore neither is our equity.

You claim banks won't suffer if there is a credit crunch. But the premise of the argument is what happens if whoever is taking the risk decides to keep taking the risk - could they "lend their way out of the crash"?

Interesting. My understanding of the Japanese stagnation (also willing to be corrected!) was a little different. With central bank interest rates at or close to 0% for so long, banks had essentially infinite incentive to make retail loans. It was not the supply-side but the demand-size that faltered - the Japanese people really just did not want to borrow. It took a long time to reverse those deflationary expectations - I mean, why borrow money for consumption when prices are falling?

I read an interesting paper about this not so long ago, entitled "Who killed the Japanese Money Multiplier?" I'll have to go dig it out and have another look, I think.

Great article. I am persuaded that consumer sentiment could be just as important as bank sentiment.

The paper seeks to identify which of two factors (low rates, bank solvency) is of greater importance in determining bank lending. The answer seems to be low rates - but the author claims that low rates actually reduces borrowing! I disagree with the author on this point but I agree with the conclusion that low rates are not the answer for Japan (the correlation between low rates and reduced borrowing could be due to time lag effects).

My prescription for Japan would be to allow interest rates to return to a level set by the free market and to pay off some of the tax burden with freshly-printed money which would alleviate the short-term pain of higher rates.

...get real...would you trust a desperate lender anymore than a desperate borrower....when it turns to financial war trust evaporates and there are no winners ....except the vultures waiting in the corner to pick over the carcasses almost for free... :ph34r::ph34r::ph34r:

Sometimes collaborative behaviour is aligned with self-interest :o

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And the answer is - it doesn't matter (but they will try, at first). And the central banks will try injecting new capital too. But none of it will matter. You can't lend your way out of a demand problem. When you've had a decade long fiesta of injecting all residual capital and then some into the production of a good against falling demand levels, it wouldn't matter (to that market) if the lenders were offering to give new money away. There's just no (new, above historic trend) demand for boxy little one bed flats. Or for two bed flats that are only viable as flatshares. Or three bed houses priced because they're potential HMO or subdivision candidates. Nobody ever wanted them. But now we have them, in their millions. And we have the loans against them too. And we certainly don't want any more. In fact, now that we have these, a (barely) acceptible substitute, we don't really want decent houses either. Or any other higher order goods. Or any new debt. Or new money, for that matter. Nothing. Nada. Not a sausage - demand has left the building, and he's serving burgers on the Gold Coast.

None of this will matter. None of this will stop the high priests, pulling on their levers (which are no longer attached to anything at all), shaking their tiny fists, shouting at, begging the intrinsics to change. The notion that this is a demand problem is so alien, so lunatic, that they'll reject it all the way to the bottom. The prices are high aren't they? There must be increased demand... but there isn't. While you've been listening to the magician's patter, he's stolen your wallet. And watch. And tie. There is absolutely nothing that producers, lenders can do - but wait, for time, and risk, to blow off the excess supply.

Edited by ParticleMan

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Securitization is a way of parcelling out risk.

It does not transfer the ownership of the mortgage which remains with the original lender who is still responsible for handling any defaults.

You're thinking of Credit Default Swaps (see CDX).

Transferring ownership is exactly what securitisation does. It is a means of transferring ownership usually to a syndicate of licensed investment houses.

Edited by ?...!

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Securitization is a way of parcelling out risk.

It does not transfer the ownership of the mortgage which remains with the original lender who is still responsible for handling any defaults.

In most of these 'securitizations' there is a 'true sale' into an SPV/SPE which is a legal shell company. the origonal issuer then usually becomes the 'servicer' for these loans but has no ownership.

the true sale to the SPV is the key part in the disintermediation process.

http://www.isda.org/speeches/pdf/SPV-Discu...Final-Feb01.pdf

Edited by jonpo

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