subject: Bank fears financial threat from reckless lending and investing posted: Fri, 16 Dec 2005 09:55:26 -0000
[I don't know enough about this subject to tell whether these guys
actually know what they are talking about, or not, but it sounds like
they do, and they use the magic word 'leverage' many times... - Stu]
Bank fears financial threat from reckless lending and investing
Ashley Seager
Friday December 16, 2005
The Guardian
The Bank of England is growing alarmed at increasingly reckless
lending by banks to the commercial property and private equity
industries and an unhealthy appetite for riskier investments by
borrowers.
Releasing its twice-yearly Financial Stability Review today, the Bank
says that a continuing accumulation of debt and an aggressive "search
for yield" by investors poses a "significant risk" to the stability
of the entire financial system.
It highlights the relaxed lending criteria by banks and increased
demand for highly leveraged financial products, such as mortgage-
backed securities, that could be storing up trouble if some
unforeseen shock hits the financial system. "The UK financial system
remains healthy and near-term risks appear limited ... but I believe
vigilance is still called for," says Sir Andrew Large, the Bank's
deputy governor, responsible for financial stability.
The factors the FSR is highlighting raise "questions about whether,
in some areas, standards of procedure, risk appetite and financial
discipline have weakened". The Bank holds regular talks with the
Financial Services Authority, at which it discusses possible risks to
the stability of the British and global financial systems.
"We must remember that the financial environment is now more complex,
opaque, interconnected and leveraged, so a wholly benign outcome may
not be a foregone conclusion," says Sir Andrew.
The FSR highlights as a potential shock things such as the
downgrading of the credit-worthiness of General Motors and Ford
earlier this year as well as the filing for protection from creditors
by the former GM subsidiary Delphi and the commodities brokerage
Refco. These events had only a short-lived impact on resilient credit
markets. However, the review says a fresh shock could prompt an
investment stampede out of a particular market, destabilising the
financial system, as the collapse of the hedge fund Long-Term Capital
Management did in the late 1990s.
One area of concern is the marked rise in UK banks' exposure to the
commercial property sector which has generated significant returns in
recent years. The global mortgage-backed security market has grown
rapidly, the review says, allowing greater leveraging up, or
borrowing.
"As with leveraged loans and with structured products engineered from
instruments that are already leveraged, there are signs that the
quality of the underlying asset pool may be deteriorating," it says.
"So abrupt swings in financial market sentiment, or a marked
deterioration in the economic climate, could create difficulties for
firms and lenders."
The Bank remains reasonably relaxed about mortgage lending in
Britain, which it thinks is not excessive and presents little danger
to the financial system, especially in a more stabilised housing
market.
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