Net mortgage lending by banks dropped in May for the first time on record, according to industry data, though the indication of strain in the financial and household sectors was tempered by news people continued to spend in shops.
Data from the British Bankers’ Association on the country’s six main banks show capital repayments – which have been rising steadily for three years – overtook gross lending in May, after seasonal adjustments, for the first time since the BBA started collecting data in 1997.
This month, the Treasury and the BoE announced new measures to lower banks’ funding costs and unblock the flow of credit to the real economy. Senior executives at Lloyds said the “funding for lending” programme could reverse a previous strategy to shrink their mortgage book this year.
Separately, a retail survey suggested households had not entirely battened down the hatches. Retailers surveyed by the CBI, the business lobby organisation, reported further annual growth in sales volumes and orders in June, lifted by the Queen’s jubilee bank holiday.
BoE governor urges reform of Libor
Sir Mervyn King, governor of the Bank of England, said on Friday the Libor benchmark interest rate should be based on transactions, rather than the current system based on estimates.
Sir Mervyn said the idea that “my word is my Libor” was now dead after Barclays was issued with a record fine for trying to manipulate the London interbank offered rate.
Libor – the London interbank offered rate – is calculated using banks’ estimates of the price they think they can borrow at.
Sir Mervyn questioned why it was sensible to use a rate compiled from quotes – or even hypothetical estimates in a thin market – for so many other contracts.
“We will make sure that the system, which was rigged in the favour of at least one and possibly several institutions, is fixed,” he said. Speaking at a press conference on the financial stability report, the governor called for a change in the culture of the banking industry, saying something had gone “very wrong”. He said the situation required a “leadership of an unusually high order and changes to the structure of the industry”, but ruled out a Leveson-style inquiry into British banking, which some politicians have been calling for. Sir Mervyn urged the government to enact the Vickers plan – to separate investment and retail banking – as soon as possible.
Credit crunch will get worse warns The Bank of England
Businesses and households were yesterday warned that the credit crunch crippling the economy is set to intensify after it emerged Britain is deeper in recession than feared. The Bank of England said the cost of mortgages and corporate loans has risen in the past three months as banks passed on higher funding costs to customers. In its latest credit conditions survey, the Bank warned that ‘a further marked’ increase was expected in the next three months in a bitter blow to firms and families across the country.