Banks show little interest in lending

Banks show little interest in lending

One missed credit-card payment never used to be reason enough to refuse a mortgage application. But in these times of financial crisis, the few lenders left in the market are pickier than ever. According to Ray Boulger, senior technical manager at broker John Charcol, it is evident that while the government may have rescued the banks, their customers have been left out in the cold.

The credit card slip-up meant one client was forced to accept a smaller mortgage. Boulger says: "There is a lack of competition in the market. There are only six mortgage groups who are active in the market and that is having an impact on [profit] margins."

There is growing public discontent with banks, and the issue is spanning traditional religious divisions, as RBS chairman Sir Philip Hampton discovered last week. He was handed copies of the Torah, the Qur'an and the New Testament by religious leaders protesting about exorbitant rates of interest. As well as cracking down on City traders' bonuses, they would like to see the government bringing back the ancient laws of usury, limiting how much banks can charge for loans.

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Boulger says the impact of a lack of competition has already become increasingly apparent. Before the meltdown, there were up to 100 brands fighting for business in the mortgage market. Now, by his reckoning, the only serious players left are the part-nationalised Royal Bank of Scotland and Lloyds Banking Group, HSBC, Barclays, Santander (Abbey and Alliance & Leicester) and Nationwide Building Society.

The mortgage market is the clearest illustration of the reduction of competition. But in the savings industry, too, the plethora of institutions offering headline-grabbing rates has also shrunk. The collapse of the Icelandic banks, the rescue of the Irish financial industry and the flight of savers to safe institutions has cut the number of savings products on offer.

The withdrawal of some very active competitors has alleviated the pressure on those that remain to fight for customers. In the savings market, brand is now what matters. "We've gone back to a premium on the name," says one banker.

Competition, or the lack of it, in the banking industry was highlighted last week by shadow chancellor George Osborne, who pledged that a Conservative government would hold an investigation before the taxpayer's stakes in RBS and Lloyds were put on the market.

"We need to have a strategic view of the kind of banking system we want at the end of that process," he said. "We shouldn't just go into it blind."

While Labour accused Osborne of hiding behind a competition review in order to avoid having to devise his own policy on the disposal of bank shares, the government itself has acknowledged that there is a problem to be tackled. In allowing Lloyds TSB to rescue HBOS last September, competition rules were deliberately overlooked on the grounds of financial stability.

The Office of Fair Trading warned the business secretary, Lord Mandelson, that the tie-up would cause "substantial lessening of competition". The combined bank controls about 25% of personal bank accounts and about 28% of the mortgage market, which would normally have raised concerns.

The reduction in competition appears to be allowing those financial firms left standing to do business more profitably. Sandy Chen, banks analyst at Panmure Gordon, says: "The margins on new business are wider. They are charging a lot more." However, Boulger points out that, in the mortgage market at least, lenders' existing loans - known as the "back book" - are likely to be loss-making, given the dramatic cuts to interest rates that have left some tracker products offering very cheap deals for their customers.

Chen's gloomy analysis of the banking sector suggests that the poorer sections of society are being hit hardest.

The top earners, he argues, "are enjoying falling mortgage payments (if they have a mortgage at all), a generally deflationary environment and excess household cash flows". However, "at the other end, roughly half of UK households are facing negative cash flows, an inflationary environment and the combined threats of negative equity, difficulties in refinancing or remortgaging, and unemployment."

As long ago as March 2000, an influential report by Don Cruickshank into the banking industry was already raising concerns about competition, noting that the barriers to new entrants were high. One new lender - Bank of China - has jumped those barriers in recent weeks by piloting a range of mortgage products. But many more will need to follow to get the competition flowing again.

guardian.co.uk © Guardian News and Media 2009