Egg card decision was a scramble
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Last week internet bank Egg told 161,000 of its customers that it would be withdrawing their credit card facilities.
Is this a sign of the times, an opportunistic move or an over-reaction by Citigroup, the company that purchased the bank from Prudential last year?
The management team cited an unacceptable level of risk as the main reason for withdrawing the credit facilities. But many of the customers involved have excellent credit histories with the bank, leading to speculation that it is taking the opportunity to dump unprofitable customers and using the worldwide credit crunch and consequent tightening of lending criteria as an excuse.
Considering this move, I can't see an obvious upside for the bank. Surely when a customer misses a payment or carries some debt on their credit card it proves they are precisely the type of customers the bank wants, because it can make money out of them. Borrowers who pay off their credit cards each month and never miss payments may be not as profitable but they help banks maintain liquidity.
It all seems a bit sinister and nonsensical, which leads me to think this was an emotional decision on the part of an over-zealous management. This may be OK for some firms but for the world's largest banking group, it's worrying.
Lawyers may pursue crunch banks
One of the City's last taboos is about to be breached if the word on the street is to be believed. The deepening crisis in the credit market has emboldened a number of specialist law firms to square up to banks in the face of increasing complaints from investors.
A number of these firms say that since the start of the liquidity crisis last summer they have seen a dramatic increase in enquiries from investors claiming they were sold low-risk assets that ended up being worthless repackaged US sub-prime mortgages.
Standard & Poor's recently stated that legal action brought by unhappy investors poses one of the biggest threats to the banking sector but was less clear about the extent of the potential threat.
While many of the legal firms that operate in this market get a significant slice of their income from banking institutions, they are under increasing pressure from clients to take on banks in litigation.
And given what we know about the lack of transparency in the banking sector as a result of the liquidity crisis, things are not looking good for the institutions on the receiving end of this action.
Balance sheet lenders face a shock
Much has been written about the fate of non-balance sheet lenders since the onset of the liquidity crisis but recent events suggest that the smugness of some balance sheet lenders may be unjustified.
A medium-sized society was put on review recently with a view to a possible downgrade by one rating agency because of its exposure to the sub-prime, self-cert and buy-to-let markets. This exposure was through its originated book via either a wholly-owned specialist lender or previous acquisitions.
If the downgrade happens, it could send another shock wave through the industry - only this time it would affect balance sheet lenders that have until now managed to avoid much of the fallout from the liquidity crisis.
As we know, many prime balance sheet lenders have established specialist arms or acquired books of business on wholesale markets in recent years and it is these firms ratings agencies seem most concerned about.
Equally, as it becomes harder to remortgage away from lenders, I wonder if the same
organisations are starting to see more delinquencies as borrowers get stuck where they are.
But there's an irony here. The rating agencies that are now so vocal stirring up concerns around the world like meddlesome kids were surprisingly quiet at the onset of the liquidity crisis.
Then they laid the blame firmly at the feet of US sub-prime lenders. They seem to have conveniently forgotten they might have had something to do with it.
