Banks warned that cost of borrowing could be permanently raised
March 6, 2008
Banks have been warned that they will not be able to raise money as cheaply as they have done in the future by selling off their loans, and that having to keep more loans on their own books means that the costs of borrowing could increase on a permanent basis. The warning came from the Chief Executive of the Financial Services Authority, who added that the financial turmoil in the money markets means that banks are likely to have to change the way in which they operate.
Since the global credit crunch tore across the UK last year credit conditions have already become much tighter, which banks more reluctant to lend money due to higher risks and higher borrowing costs to themselves, reflected in the drop in mortgage approvals, which is down 31% compared to a year ago. Many banks have scrapped mortgages of 100% of more, and many others have raised the amount of deposit required from borrowers that are looking to take out a mortgage loan.
The Chief Executive of the FSA, Hector Sants, stated: “Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen. Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect.”
Mr Sants made his comments in an interview with the BBC, and one BBC official said that the message indicated that there “will be a pretty steep reduction in the amount of credit available and the cost of it”.
Mr Sants said that he would be making a speech later in the week to hundreds of banks and financial institutions to deliver this message. BBC officials also said: “His comments represent a sound ticking off for the City.”
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