As far as mortgages are concerned the most obvious questions in relation to Vickers are what impact will it have on mortgage pricing and availability, bearing in mind the impact on banks’ costs.
I think it is far too early to come to any conclusion on this and in any case doubt we will know the answer even after the event.
It will be impossible to separate out realistically the extra costs banks will incur from complying with Basel 3 from those incurred as a result of Vickers, together with other factors influencing pricing over the next eight years.
Vickers will be just one part of the mix, albeit an important one.
Competitive pressures are another key factor in mortgage pricing but most of the focus of the government and other interested parties when looking at how to increase competition in the banking sector has concentrated on the current account market, with little reference to mortgages.
Any recommendations, such as those in the Vickers Report, for improving the process for switching current accounts are certainly to be welcomed.
But perhaps more thought needs to be given to why, quoting figures from Vickers, 77% of current accounts are with only four banks.
All the evidence is that in general people are reluctant to change their current account provider, even though customer satisfaction levels with banks are low, whereas we know that they are much more likely to change their mortgage provider.
When choosing a bank for their current account those people for whom a branch network is important will obviously favour a bank with plenty of branches and indeed may take some comfort from having their account with a bank that is not “small enough to fail.”
The regulators may think that forcing RBS and Lloyds TSB to divest themselves of hundreds of branches is just punishing those banks. Although it is doing that it is punishing the innocent customers of those banks much more. The millions of customers affected will be forced to change banks unless they take evasive action, instead of being allowed to change their bank should they wish to do so.
When it comes to their choice of mortgage provider the number of branches a bank (or any other lender) has is much less important, not least because nearly 50% of mortgages are arranged through intermediaries.
There is much more variety, both in terms of type of product and pricing, in the mortgage market than there is in the current account market, which is a key factor in mortgage borrowers’ willingness to switch lender.
Much of what competition there is for current accounts is based on what extras a bank offers in exchange for a monthly fee.
Marketing these fee paying current accounts on the basis that they offer benefits worth up to x pounds per year is highly dubious, albeit a common marketing tool, as not only will most borrowers not use all the benefits offered but the claimed value of each benefit is usually inflated as the benefits can often be obtained at a cheaper cost from a different provider.
Presumably the FSA allows such financial promotions on the basis of the use of the weasel words ’up to’.
Prior to the credit crunch the average life of a mortgage had fallen to only four years.
That doesn’t mean everyone changed their mortgage after four years, but the majority did. Some will argue that there was too much competition in the mortgage market prior to the credit crunch but few would argue that applies in today’s market. Too much consolidation the banking market will restrict mortgage choice.
Thus although the government appears to favour a major consolidation in the banking sector, if the Lloyds TSB and Northern Rock branches are bought by an existing mortgage lender that will reduce competition in the mortgage market as the products from two lenders would undoubtedly disappear in due course.
This would only be beneficial to consumers if the new larger company offered more competitive products but many of the most competitive mortgage products are offered by small and medium sized lenders.
In the short term the Eurozone sovereign debt crisis is much more relevant to the banking sector, and hence mortgages. As an indication of how the situation is progressing from awful to critical the yield on Greek two year government notes exceeded 60% for the first time today, less than a week after it hit 50%, and its 10 year bonds now yield over 20%.
A Greek default is now a foregone conclusion. It is a question of when will it happen and how big will the haircuts be. More worrying is the increased pressure on Italian and Spanish debt. Italy today had to concede a yield of 4.15% on the sale of 12 month bills, compared to “only” 2.96% at the last sale a month ago.
The ECB appears to have capitulated to the market in its struggle to keep the yield on Italian and Spanish 10 year bonds below 5%.
So far today their respective yields have risen by 0.11% and 0.12% to 5.48% and 5.24%. On the other hand the prices have risen, and hence the yield has fallen, on bonds of countries considered safe havens. For example so far today the yield on UK 10 year gilts is down 0.06% to 2.20% and on German 10 year bunds down 0.05% to 1.71%.
In the short term the impact of the Eurozone Sovereign debt crisis will be much more relevant than Vickers to the availability and pricing of UK mortgages.