Monday, March 02, 2009

January lending figures from the Bank of England

The monthly lending figures from the Bank of England were released today, and predictably the newspapers have reacted with screaming headlines saying that Mortgage lending plunges by 60% and lamenting how this would affect the economy.

Delving into the figures shows a more interesting picture, however. It's net lending that had plunged (i.e. new lending less repayments and redemptions). Mortgages issued for purchases of houses were slightly higher in value compared to December. Remortgages are down - but that's because of a lot of people coming off their fixed-rate onto the standard variable rate are deciding to stay there instead of remortgaging for another fix (rational as the arrangement fees on new fixed rate mortgages have soared). As a result, gross lending is down by £875 million.

But net lending is down by £1104 million. Which suggests that in January households made a concerted effort to use the money released by falling interest rates to pay down their existing mortgages. This is actually a good thing. It puts households in a stronger position, and as explained in my previous post, repayments of capital help banks and building societies who wish to reduce their wholesale funding.

It's coping with the roll-over of wholesale debt that continues to pose a problem for the banks. According to UBS, HSBC has $97.3bn in securities maturing in 2009/10, Barclays has $69.8bn, and HBOS has $57.6bn in securities maturing in 2009/10. They can either try to refinance these over by issuing new securities - but every bank in the world will be trying this, and competing with governments also seeking to borrow from the markets at the same time. They can try for a rights issue to raise money from shareholders (as HSBC is doing). They can simply get more capital from governments through bailout schemes (but will make them even more "nationalised" than they are), or they can rely on households repaying debt at an accelerated rate.

The commercial sector is not repaying debt (most of the horror story of the HBoS losses concerns their commercial lending unit). Shareholders are reluctant to inject more money into banks - see the sell off of HSBC's shares today following the reports of the losses they made in the US and Asia and the announcement of their rights issue. Governments can inject more money, but there is a reluctance to nationalise, and the more money injected the closer outright nationalisation gets. That leaves households, the one sector that has had their disposable income increase, thanks to falling interest rates, falling oil and falling prices. As I said before, if I was in charge of these banks, I'd be writing to every mortgagee on a tracker or standard variable mortgage, pointing out the benefits of making extra capital repayments. The banks are not making much profit on these mortgages anyway, so they might as well encourage people to pay the money back.


Anonymous said...

Muddled economics Snowflake. If too many citizens start piling cash into paying off their debt then spending will drop dramatically and the recession will deepen. This is analogous to the 'Paradox of Thrift' in savings as identified by John Maynard Keynes.

snowflake5 said...

Wrong Anonymous. If someone's disposable income has increased by £200 due to interest rate cuts and they use £100 to overpay the mortgage/other debt and £100 for extra spending, their spending increases compared to before the interest rate cut, their debt decreases compared to before the interest rate cut, and the bank gets some money with which to pay down some of their money market loans.

If the consumer manages to clear an entire debt, (say credit card debt), then their disposable income will jump as soon as the debt is cleared, by the amount freed up by not making debt payments any longer. Which they can either use to spend or clear other debts. In fact once the debt overhang clears, the economy should rebound sharply.

The Paradox of Thrift only applies if EVERYONE stops spending - i.e. if people who have no debt at all stop spending, government stops spending, business stops spending and households with debt stop spending. But those who have no debt will continue to spend as normal, and of course govt has stepped in to spend. Which leaves only the sector with debts who have reduced spending in order to clear debt, but it's vital that they do so the economy can rebound.