LAST week saw the Government buy shares in a UK bank for the first time – Royal Bank of Scotland – as part of its stability package for the financial markets. This package has now begun in earnest here, and in all other major countries, to try to bring stability to the financial system.
And when a specialist lender – London Scottish Bank – went into administration this week, the industry, plus the Government, stepped in to ensure that savers would be repaid in full, just as we collectively did with the Icelandic banks.
Government
s and central banks around the globe are providing packages of measures and fiscal stimuli to minimise, where possible, the impacts of recession. So far, depositors in the UK have been fully protected, whether it is a high street name or a lesser-known entity that has got into difficulty.
The importance, though, is to see how these difficulties have been brought about.
Banks use a mixture of money from deposits and the wholesale market (where banks and others lend their money to each other) to provide customers with loans – for instance,
as mortgages and loans to business and industry.
These wholesale and inter-bank markets began to go badly wrong
last year when it became clear that the world's financial system had become infected by high-risk investments which had previously been thought to be low-risk products. This is the sub-prime mortgage lending problem.
In the United States, mortgages are not regulated, and mortgage brokers loaned money to people who had absolutely no hope whatsoever of even managing to meet the interest repayment requirements – and many of these individuals had no
job, either.
The sellers of these mortgages then packaged them up and sold them on. They were then mixed in with other types of investments, judged by credit rating agencies as high quality, and then sold on as high-quality investments around the world.
In many instances, the "high-quality" tag was proved to be incorrect. Defaults started and investors could not tell with any certainty which were high – and which were low-risk investments.
These investments have had to be written down and the uncertainty has caused problems within the banking industry right around the world, but particularly in the US. This means that banks are having to pay more to borrow money.
And it continues to cost banks more to borrow money, regardless of whether the Government has helped to strengthen their balance sheets, whether they have added more capital from their own resources, or whether the Bank of England
has cut its interest rates for short-term lending.
That cost has inevitably found its way to borrowers. And so, for the customer, this means interest rates for borrowers have remained comparatively high.
The banks know these are difficult times for many people and for business. The Banking Code already contains a promise to treat customers sympathetically and positively if they face financial difficulties, but beyond that, the banks have made the following promises to their customers in the coming downturn.
They will:
Get in touch with you if we see that you may be heading towards financial difficulty.
Get to know you and how to help – this may mean asking for details of your income, expenditure, assets and liabilities.
Speak to you in plain language and in the way you want, for instance, by telephone, email or letter – whichever you prefer.
Agree with you, where possible, an affordable repayment plan you can stick to so you can pay your bills.
Only ask you to repay your debt once you have set aside money for things like the mortgage, council tax, heating and lighting.
Take into account how any changes in your personal circumstances could affect your financial situation.
Provide you with contact information about where to get free, independent money advice.
Work with your nominated adviser, unless that is not in your
best interests.
There are similar pledges for businesses in the Business Banking Code too.
We welcome Gordon Brown's recent announcement that these codes will be put on a statutory footing – in fact, we have been in discussion with Government all year about doing
just this.
Regulatory changes and more will take place as the causes and consequences of the financial system's problems are fully understood. The industry understands the concerns, people's worries and what it needs to do to build back trust.
As we look to 2009, the banks are continuing to do everything they can to help and support their customers – both personal and business – through this recession.
Angela Knight is chief executive of the British Bankers' Association. She is a former Sheffield councillor, was Erewash MP from 1992-97 and is a former Economic Secretary to the Treasury.The full article contains 799 words and appears in n/a newspaper.
