Earlier this week, the Basel Committee hosted a meeting in Frankfurt to discuss their catchily titled consultation,
Revisions to the standardised approach for credit risk, “to reconsider the design of the standardised approach, to ensure its continued suitability for calculating the capital requirements for credit risk exposures.”
It would be all too easy to dismiss this consultation as purely technical and simply aimed at increasing financial stability across the financial services Industry. Yes it is both of these things, but much more.
The element of ‘more’ that I am most concerned about is that, if the proposals remain unchanged, we will be looking at a UK mortgage market that is fundamentally different in shape. A change that will not be to the benefit of aspiring home owners or most lenders or in fact anyone associated with the mortgage market.
On 2 February a headline in the Times newspaper read, “Secretive bank watchdog could slam door on first time buyers.”
This was one of those headlines that really didn’t over-dramatize the situation. In fact not only could the Basel proposals effectively restrict lending to first time buyers, it could also affect a far wider number of home-buyers than that. In the firing line could also be: lending to social housing providers, buy to let mortgages and self and custom build, all in various ways on party agendas, and all elements in solving the current crisis in housing supply.
In essence, the changes currently proposed would make mortgage lending and therefore borrowing in the UK far more expensive. Why? Because lending, especially at higher loan to value ratios, would become substantially more capital intensive. And the need for lenders to put aside more capital against each of these loans (from the current 35% level potentially up to 100%) means higher costs and more than likely a reduction in supply.
At Tuesday’s meeting in Frankfurt, these points were eloquently made by the European Association of Co-operative Banks, of which the BSA is a member. The Association attended alongside members of the Basel Committee task force on this topic, plus other industry associations ranging from the European Mortgage Federation, World Savings Banks Institute and the International and European Banking Federations.
Whilst nothing would move for a couple of years, we are in no doubt that left unchanged we are heading for challenges for lenders; intermediaries and for aspiring home buyers in around three years from now. And I don’t forget the UK economy either, which is a net beneficiary from all the associated aspects of home buying, from white goods to professional services, and from builders to DIY stores.
I have rarely felt so passionate over something so impenetrable. There is still an opportunity to respond to the consultation and ask Basel to think again and we will certainly be doing just that. In Frankfurt they were in listening mode – let’s make sure that we don’t sleep walk into an unnecessary nightmare.
The consultation closes on 27 March 2015.
NOTE: Building Societies provided 26% of all new mortgage lending in 2014, helping 373,000 people to buy a home.