26 November 2015

Devil's Advocate

Roger Elwell - Yes Please

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Transaction Banking

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Bank Loan Insurance Must End

19 January 2009  |  2682 views  |  0

If you go back less than a working generation, a bank would lend money and then manage that loan through to complete repayment.  If it had done its assessment properly, and if the customer was fortunate enough to not suffer any financial misfortune, at the end of the loan period it would have been satisfactorily repaid and both parties would have been happy with the result.

In this old world, both the customer and bank had obligations to meet, and a stake in the eventual outcome.  That meant that both parties were very careful to borrow and lend only what they could sensibly afford – at least when the loan started.

 I think all that changed when the so-called Masters of the Universe invented CDSs and CDOs.  All of a sudden, a banker could agree a loan and pass the responsibility for collecting it on to someone else.  They lost the sense of having a stake in the outcome.  It is, frankly, ridiculous that any bank can insure against the loan going bad.  They carried out their assessment and took the decision to lend, in the same way that the borrower took the decision to assume the responsibility to repay.  It is ridiculous that someone else should take on trust that the banks’ lending policies are tight enough and buy the debt off them.  Why would a bank sell on its own lending and buy someone else's? 

What we are seeing now is the inevitable result of that folly, as well as the impact of putting huge targets on loan and mortgage 'sellers' (note, no longer 'lenders' but 'sellers') to churn more lending through the books.

If we are to get the financial system back to normality, we have to unwind all of this and get banks back to the old practices.  To therefore now provide them with the ultimate insurance – a Government guarantee to cover their losses - is something we should only be doing as an act of desperation.  It should be made clear that this is an emergency measure and that, as the crisis abates (as it will do in, say, 5 years’ time), they WILL be forced to return to the old lending practices and that UK banks will not be allowed to insure their debt, buy another bank’s debt, or anything of the sort in future.  making them fully responsible for their own lending decisions will - maybe - make them think carefully about what they lend to whom in future -which is how it should be.

Does the UK governing classes have the will to put that regime in place?

TagsCardsRisk & regulation

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job title Consultant
location Colchester
member since 2008
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Consulting to the financial services industry with a specific expertise in the cards business - issuing and acquiring.

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