Category Archives: Economic

Banking, Britain, Economic, Financial Markets, Government

Lending to small and medium sized firms on course to hit a 7-year low…

BANK LENDING

Bank lending to businesses is projected to slump to its lowest level for seven years, a report from Ernst & Young has warned.

UK banks will lend £422 billion to firms this year – the lowest amount since 2006. This is well below the £575 billion lent in 2008 before the financial crisis.

The figures from the Ernst & Young Item Club underline the crisis facing many companies as banks starve them of the funds they need to grow and prosper. The problem poses a serious threat to the economic recovery.

The Item Club report warns that lending will not return to its pre-recession peak until 2017.

Financial analysts fear small and medium sized firms are struggling to get the funds they need to grow, or by taking on staff that will be needed to drive the economy.

The further fall in lending this year will disappoint officials at both the Treasury and the Bank of England, who launched the £80 billion Funding for Lending scheme last summer.

This scheme was intended to increase the flow of cheap loans for households and businesses.

While there is evidence that mortgage lending is increasing, particularly to first-time buyers, there is little to suggest that small firms are getting access to the money they urgently need.

The Item Club report also showed that around £200 million was lent last year to small and medium-sized enterprises, or SMEs, through ‘peer to peer’ lending – which allows people to lend directly to businesses.

An economic adviser to the Item Club, said:

… We expect peer to peer lending to grow rapidly in the next few years as demand for funding from SMEs outstrips supply from the banks.

The report does predict, though, that bank lending will pick up as the economy recovers, rising to £452 billion next year, £497 billion in 2015, £545 billion in 2016 and £602 billion in 2017.

A spokesperson for the accountancy firm Ernst & Young, said:

… Corporate lending won’t increase enough in 2013 to compensate for the dire first half of the year. We expect it to pick up in 2014, raising hopes that UK companies may invest some of the cash back into the wider economy.

… The banks should be able to increase their credit supply – regulation permitting.

And, despite the recent pick-up in the economy interest rates look set to remain flat lined. The Bank of England’s monetary policy committee, which will meet on Thursday, is widely expected to peg interest rates at 0.5 per cent for a 54th month in a row.

Standard
Banking, Britain, Economic, Financial Markets, Government, United States

Libor handed over to the Americans…

BLOW FOR THE CITY OF LONDON

The owner of the New York stock exchange has been handed responsibility for setting controversial LIBOR interest rates in a move slammed by MPs as a ‘tremendous blow’ to the City of London.

Earlier this week the Treasury confirmed that the key role will pass from lobby group the British Bankers’ Association (BBA) to transatlantic NYSE Euronext from early next year.

The process, which will still take place in London, will be overseen by City watchdog, the Financial Conduct Authority (FCA).

But while FCA head Martin Wheatley hailed this as ‘an important step in enhancing the integrity of LIBOR’, John Mann, a member of the Treasury Select Committee, blasted the decision.

The Labour MP said it was further evidence that British banks are being unfairly singled out for rigging LIBOR interest rates – while, he says, their US counterparts escape punishment.

He said:

… This is a tremendous blow to the prestige of the City of London and sends out the message that you can’t trust the British.

… What the Americans have been doing is selectively picking out British banks that have done wrong and selectively ignoring the same scandals that have been committed by their own banks… The Chancellor has failed to stick up for the City. French and Germans will be rubbing their hands with glee at the prospect of stealing other financial markets.

LIBOR – The London Interbank Offered Rate – is a key benchmark rate which is used to set mortgages for millions of homeowners and is linked to $300 trillion of financial contracts around the world.

The BBA was criticised for being asleep on the job as a number of banks, including Barclays, the Royal Bank of Scotland and UBS, routinely rigged rates under its nose.

This culminated in huge fines for these banks and the decision by an independent review headed by Mr Wheatley to strip the BBA of its role.

The decision to award the contract to the New York Stock Exchange-owner followed a bidding war orchestrated by an independent committee, headed by former journalist Baroness Hogg – now a senior independent director at the Treasury. NYSE Euronext, which owns the pan-European Euronext market and will pay £1 for BBA Libor Ltd’s assets, said it is ‘uniquely placed’ to restore the international credibility of LIBOR. BBA has refused to reveal how many of its employees work on LIBOR.

Failed bidders are understood to include financial information provider Thomson Reuters, which has calculated LIBOR on behalf of the BBA since 2005.

libor

COMMENT

The British Bankers’ Association, a wildly discredited organisation given its mishandling of LIBOR, the interest rate that sets the price for trillions of dollars of transactions across the world, has much to answer for. Its sclerotic behaviour under the BBA’s previous leadership failed to respond with any willpower to criticisms made by the Federal Reserve. Had it done so, it is possible that the LIBOR scandal – which wiped out the top management at Barclays – might never have happened.

Not that the Bank of England has totally clean hands in any of this. It may have had no direct responsibility for keeping Britain’s markets honest, but it can be accused of being lackadaisical in making sure the BBA acted on Fed criticisms and forced through reforms designed to erect Chinese walls between LIBOR setters and traders so that opportunities for rigging were stamped out.

Paradoxically, the Libor business that NYSE Euronext will inherit has shrunk dramatically. Post the Great Recession the LIBOR market has been in deep slumber because banks are so distrusting of each other, especially in the eurozone.

It’s possible that among the reasons for awarding the LIBOR contracts to NYSE Euronext rather than the London Stock Exchange is that London’s bid came in association with Thomson Reuters, the financial institution which set the reference rate under the old broken regime.

Thomson Reuters’ independence has been challenged recently by the New York State Attorney Eric Schneiderman who is critical of an arrangement under which premium customers get privileged access – a two second advantage – to the University of Michigan consumer confidence index. At a time when the City is under siege from Brussels over a variety of issues, it does seem bizarre that we should allow an interest rate market that grew in London in the 1970s, to escape US tax measures, to head back across the Atlantic.

And while several European banks, including Barclays, RBS and UBS, have paid a heavy price from US regulators for LIBOR manipulation, so far there has not been a single successful prosecution or settlement with an American bank. That in itself should raise many previously unanswered curious questions, as LIBOR setting now moves to the United States.

Standard
Britain, Consumer Affairs, Economic, Government, Politics

Consumer Affairs: Payday loan firms…

PAYDAY loan firms will not be banned from charging excessively high interest rates, despite a promised Government crackdown on sharp practices in the industry.

Leading companies were summoned for talks in Whitehall with Consumer Affairs Minister Jo Swinson MP, today, amid a myriad of concerns that they are driving desperate families to financial ruin.

In a toughly-worded intervention, Miss Swinson, the Member of Parliament for East Dunbartonshire, said she is determined to curb ‘irresponsible behaviour which exploits vulnerable consumers in financial strife’.

The minister of state confirmed payday loan firms such as Wonga will not be ordered to cut their interest rates. The LibDem MP cited concerns that people could be forced into borrowing from even shadier loan sharks.

Critics of payday loan firms insist that the exorbitant interest rates, which can reach 5,000 per cent a year, are the root cause of misery suffered by hundreds of thousands of people taking out payday loans.

Recently, the Archbishop of Canterbury, Justin Welby, called for a legal cap on payday lenders and the level of interest they are allowed to charge.

The Archbishop said:

… Once you have taken out the loan, it is difficult to get out of the cycle. With the rates offered, simply paying off the interest becomes a struggle.

Consumer organisation Which? published a study showing a million families a month are forced to take out payday loans. It found some 400,000 people take out the high interest loans to pay for essentials such as food and fuel. A further 240,000 need the cash to pay existing loans.

Which? says that almost half of the people taking out payday loans could not cover their repayments, forcing them deeper into debt as their ‘short-term’ loans are ‘rolled over’, with fresh interest added.

The Whitehall summit comes days after the £2 billion industry was referred by the Office of Fair Trading (OFT) to the Competition Commission. It will have the power to ban or limit the industry’s products, but will take up to 18 months to report.

It is understood the OFT has given the 50 lenders until the end of July to respond to calls for them to clean up their act or face closure. Five firms have since surrendered their licence, but only 20 have responded to date.

Labour MP Stella Creasy accused ministers of being too cosy with the industry. She said:

… Having a summit about payday lending without talking about capping interest rates is like discussing arson without mentioning matches.

In reply that interest rates should be capped, Miss Swinson said that could shut down short-term loans and force people towards illegal loan sharks or by taking other extreme measures. She has suggested, though, that the focus should be on limiting the ease with which loans are ‘rolled over’.

The Consumers Affairs Minister also raised concerns about automatic payment systems that let lenders raid bank accounts of clients to claw back money they are owed.

COMMENT

Payday lenders are notorious by the way in which they operate and the rates they charge should be capped. This opinion is based on the assumption that lending money to people with poor credit histories at sky-high interest rates is wrong. Unfortunately, the problem of unsecured lending is a warren of complexity.

The empirical evidence elsewhere is important to consider. In many other countries, including France, Germany, Australia and Japan, and in many states in America and provinces in Canada, interest rates are capped at a ceiling – such as 36 or 48 per cent a year. But this means that companies cease to offer loans to risky customers, who are then forced into the hands of illegal loan sharks, often run by organised crime gangs. Arguably, it is better to have payday lending in the legal economy, where it can at least be regulated, than to drive it into the criminal underworld.

Stella Creasy MP has campaigned tenaciously against irresponsible lending. She has said that the problems with a rate cap should not mean that we cannot act. Rather, she says, we must work harder and learn from others how best to act. She has proposed a cap on total repayments to try and break the cycle on compound interest and rollover debts that end up many times the size of the original loan. A way needs to be found without choking off the legitimate market for emergency short-term borrowing.

This, however, should be just the start of a programme of reforms to limit abuses in the payday-loan market. Further issues should be addressed by the Competition Commission following the investigation launched last week.

The Commission’s task is to look at unfair competitive practices that are suspected of giving borrowers a bad deal, such as convoluted information about interest rates and how they are applied. Lenders are also known to make it hard for borrowers to switch to a rival company.

A plethora of reforms are needed within the payday-loan industry. Any programme of serious reform should start first with the underlying causes of problem borrowing. Advertising, for example, should be restricted, on similar principles that have already been applied to the advertising of alcohol and tobacco. Adverts for payday loans could carry information about where to get debt advice. Payday lenders could be required, too, in paying a levy to fund helplines and services to help with addictive and self-destructive behaviour that leads to indebtedness in the first place, or to support the work of credit unions.

Standard