Mixed feelings on impact of Basel capital rules on mortgage lending
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ANGELA KNIGHT CHEAP MONEY ERA IS OVER
Opinion is divided on whether the extra capital requirements being placed on banks will stifle mortgage lending further.
Last week the Basel Committee on Banking Supervision agreed that banks will require a minimum core Tier 1 capital ratio of 7%, up from the current 2%.
Under the Basel III rules banks will have to increase their core Tier 1 capital ratio to 4.5% by 2015. They will also have to carry a conser-vation buffer of 2.5% by 2019 to protect against periods of difficulty.
If banks’ capital ratios fall below 7%, the regulator might ban them from paying dividends and bonuses.
Some commentators have argued that most British banks will be unaffected as they currently have a Tier 1 capital ratio of 10%.
Vicky Redwood, economist at Capital Economics, says the changes are unlikely to be the key detriment to banks’ lending behaviour in the near term, but could choke any lending recovery fur-ther ahead.
She says: “Higher capital and liquidity ratios mean banks will have to shrink their balance sheets or pass the cost of higher capital and liq-uidity on to borrowers - which would lead to weaker lending.”
But she adds that there are some reasons to think lending won’t be too badly hit. First, because the rules are not being implemented until 2018, second, because banks’ balance sheets have improved and third, because banks may find ways to circumvent the rules.
But Angela Knight, chief execu-tive of the British Bankers’ Association, says although UK banks are in a stronger place than most on capital, the
Basel changes need to be implemented over a long timetable and carefully se-quenced to avoid prolon-ging the downturn.
She says: “The liquidity requirements are also sig-nificant as they feed through to the price and availability of lending. A bank is like any other business - if its fixed operating costs go up so does the price of its products.
“All the changes are good from a stability perspective but add bill-ions to the fixed operating cost of a bank. The result is that the cost of credit - the price that borrowers pay for money - will rise. The cheap money era is over.”
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