market Update 7th September - rates, banks and housing market

Posted on 8 September 2009 by Drew

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Rates

Bank Of England rate  - 0.5%  - kept on hold (next decision 10th September)
ECB  rate kept on hold at 1%  - (next decision 8th October)

A meeting of the Bank for International Settlements (BIS), which consists of the world's central banks, have backed new measures to strengthen supervision of the global banking industry, and pledged to increase bank's capital requirements. The plans should "substantially reduce the probability and severity of economic and financial stress," the BIS said. However they did not set out a timeline for implementation of the proposals. The measures will be outlined in detail by year-end and be introduced in a way "that does not impede the recovery of the real economy."

The BIS, established in 1930 in the aftermath of the Great Depression, consists of 55 member central banks and is based in Basel. The meeting, on Sunday, was held by members of the Basel Committee on Banking Supervision. "The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level," said Jean-Claude Trichet, the head of the European Central Bank chief who presided the meeting. In addition to holding on to more capital, the BIS agreed to boost the standards for so-called "tier one" capital requirements - which essentially means the quality of the assets that banks have on their books in relation to their deposits.

Banks    

The much heralded G20 meeting of finance ministers has agreed a series of measures to try to regulate the global banking system, including new controls that rewards long-term performance rather than short-term risk-taking. However the meeting did not agree on specific limits on the amounts individual bankers get paid. Britain, the US and Canada opposed the idea, but the Financial Stability Board is to examine the issue. It will report back to the summit of G20 leaders in Pittsburgh, Pennsylvania later this month.

The countries agreed on measures requiring banks to disclose the pay and bonuses of their highest-paid employees and to allow bonuses to be "clawed back" if decisions which seemed successful later go wrong. The FSB has also been asked to look at the desirability of new rules which would allow regulators to rule on whether the total pool of cash set aside by a bank for bonuses is excessive, given its long-term financial stability and strength. Ministers also pledged to continue financial support for the global economy until recovery from recession is secured. They said they would develop co-ordinated "exit strategies" to deal with ballooning public deficits once the recession is over.

But they warned that although there were signs of recovery in the world economy, that recovery would not have happened without massive intervention from governments - and all bankers should take note that they owed their salvation to action by taxpayers. US  SecTreas Tim Geithner said the momentum for financial reform needed to be kept up despite the signs of an upturn. "Actions (by the G20) have pulled the global economy back from the edge of the abyss. The financial system is system is showing signs of repair," he said. "However, we still face significant challenges ahead. Unemployment is unacceptably high. Conditions for a sustained recovery led by private demand are not yet established."

UK Chancellor Alistair Darling said all bankers were obliged "to make sure that their pay practices are responsible". He said: "Above all we are determined to take action to stop banks or other financial institutions getting themselves into a situation where their pay-and-reward practices actually encourage people to take risks which bring their institutions into a situation where they could be brought down with catastrophic results."

Discussing possible regulation of bonuses, the PM said: "If you have got an institution that is struggling or it's in the process of rebuilding itself the regulator could say that pool set aside for bonuses is really too big." Mr Darling added: "Critically now the job is to make sure that you translate those principals into practical propositions that actually bite and actually work. We need to have standards that are observed right across the world."

Banking group RBS-NatWest - majority owned by the taxpayer - has broken ranks with the rest of the industry and decided to slash its overdraft charges, in a move which comes ahead of a decision of the new Supreme Court on whether or not the OFT can regulate these charges.

From 1 October, RBS and NatWest customers will be charged only £5 for having a cheque bounced, down from £38.  The fee for paying an item on an overdrawn account falls in half to £15.  "This is good news for customers, not least because the fees for unarranged borrowing have been an area of ongoing concern for them," said the chief executive of the bank's UK operations, Brian Hartzer. "As we look ahead there are many issues to consider, but we thought it was time to move this particular customer concern forward by cutting our charges. "As it relates to past charges we are awaiting the outcome of the industry-wide bank charges test case," he added. At stake is annual income for the banks of more than £2bn a year, and many experts will be scrutinising the new structure of the bank's charges to see if the lost income is being made up elsewhere.

The RBS-Natwest group declined to say how much income it would forego each year from its reduced fees, but a spokesman said its change of policy had been prompted by the arrival of the new chief executive Mr Hartzer and that there had been no pressure from the government to change the bank's overdraft fees. It is thought many other banks will now follow suit.

The BSA has said that planned new regulation will make it difficult for them to compete with banks. Proposals from the FSA, include plans to limit riskier types of lending by building societies, thought to include high loan-to-value mortgages for borrowers with small deposits and buy-to-let mortgages. The BSA says these proposals would disadvantage the industry, and has made a formal submission to the FSA following a consultation period on the proposals. Adrian Coles, director general of the BSA, said the proposed regulation would have a "discriminatory and anti-competitive effect in the mortgage market". The FSA declined to comment.
 
UK Mortgage / Housing Market  
 
Thousands of buy-to-let investors attempting to renege on contracts where property values have dropped below agreed off-plan sale prices face legal action from developers intent on holding them to the deal. New-build flats, which were popular as buy-to-let investments, have suffered price falls of up to 40 per cent. Buyers, most of whom have paid cash deposits of 10 per cent, are now struggling to obtain financing to complete the deal. "Many investors think that they can withdraw from a purchase for which they have exchanged contracts and simply sacrifice their deposit, but the legal position on this is quite clear," said Jeremy Raj, head of residential property at Wedlake Bell, the law firm. "The buyers are legally obliged to complete on the transaction."

Categories: Interest rates, House Prices, Mortgages

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