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In My Opinion: The obstacles blocking debt recovery

The lending sector is being held back by the rate of deleveraging, the additional regulatory burden and the absense of funding from some lenders, which will make 2013 an extremely difficult year

Gary Styles MS blog

The Funding for Lending Scheme and the slight relaxation on capital requirements from the FSA may help to improve lending and any recovery in the UK but there are many more factors holding back economic recovery.

The first major force holding back recovery is the rate of deleveraging in the banking and household sector.

Banks have been quick to reduce leverage and to increase the amount of capital they hold against loans.

The impending Basel III rules and concern about exposure to further risks have driven banks towards a more conservative position. Likewise, households are uncertain about their future and worried about the outlook for employment and indeed the housing market.

The rational response to this level of uncertainty is to reduce borrowing and spending and to wait until there is greater economic stability.

The second obstacle to lending growth is the additional regulatory burden placed on lenders and banks.

Not only have banks got to build up their capital positions to meet the impending Basel III requirements but they are also expected to build additional buffers of capital to cope with whatever shocks may hit them in the next few years.

One of the biggest risks relates to the exposure to the Euro area and what this may mean for the performance of any direct or indirect lending in this area.

The need to comply with tighter rules on business conduct have resulted in many lenders being very reluctant to extend finance to the most vulnerable and credit starved groups in our society. This is evidenced by the rapid growth in loans in the payday sector in recent years.

Over 1 million customers have used payday lenders for short-term loans rather than using bank overdrafts or credit card cash facilities.

The third inhibitor to recovery is the absence of funding for some lenders. Many lenders are heavily dependent on the retail savings market. This market has very limited growth due to record low interest rates and intense competition from the mutual sector and new entrants.

The wholesale markets remain closed to many lenders as their credit ratings make this an expensive place to raise funding. The government funding for lending scheme is a welcome new source of funding to many lenders.

But it remains to be seen how much of the estimated £80bn of funding actually makes it to the household sector.

Some lenders have decided not to take part in the scheme and this has probably limited to the overall funding to nearer £60bn and once allowance is made for banks reducing existing expensive debt the net impact may be nearer £50bn or less.

This £50bn may help the mortgage sector but it is equally likely to go to the SME or small corporate sector where returns and overall debt levels may look more attractive.

The most worrying issue of all is the obvious panic that is emanating from the government and regulators alike. The assumed global and UK economic recovery that underlined the government deficit reduction strategy has not occurred and the IMF is talking about a Plan B if recovery falters.

We also have the FSA chairman talking about the need for innovation to help support growth and other officials talking about a more flexible adoption of new capital rules in the short-term. On balance, 2013 looks like being an extremely difficult year for the UK and the mortgage market.

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