Wednesday, 12 October 2016

Financial Contagion (2)

I offered an explanation as to why falling house prices end up harming the real economy (despite logic saying they ought to help it) recently, nobody came up with anything better so it'll have to do for now.

To cut a long story short, when house prices fall, people want to withdraw money from banks which are overweight in mortgage lending (which is most of them) because the banks' collateral value is falling. Most banks have about 80% of their lending on mortgages and 20% to the real economy (business loans, overdrafts, credit cards, HP deals/personal loans etc).

It is impossible to make mortgage borrowers repay any faster than under the terms of their mortgage, so the quickest source of cash is to call in business loans, cancel overdrafts, cut credit card limits and stop offering HP deals/personal loans. So the real economy is starved of credit/finance, things which oil the wheels, and it grinds to a halt.

TBH emailed me an article about new revelations on the most extreme real life example of this i.e. the RBS Global Recovery Group which operated on a slash and burn basis. It upped fees and charges, deliberately bankrupted businesses and then a different RBS department acquired their land and buildings at undervalue 'off the market' (can't have forced sales depressing open market prices!). This is a very short term thing and must harm RBS profitability in the long run, but that's not how bankers think; it's only this year's bonus that matters.

I thought that everybody knew this, but apparently not - the BBC re-ran the story (giving due credit to Buzzfeed who uncovered it).

There's no point me summarising, it makes for very interesting reading if you have time.

The point being that without the house price falls, depositors wouldn't have demanded cash, RBS wouldn't have done the slash and burn, and had other banks been expanding their business loans or offered easy remortgages, RBS borrowers would have simply taken their business elsewhere. As things stood, RBS had them by the throat.


Lola said...

Oooo. Better than that. Working for Barrat's as a house dealer in the late '80's I came across several houses bought at a knock down price from the institution that has repossessed them - by directors of that same institution - who then re-sold/rented out. Not saying which institution - don't know who's listening...

Lola said...

Also, in Re RBS in their Natwest guise, I had a 'client' (not householders, tenants) who'd got into a bit of cashflow issues and were having grief from bank. Can't remember exactly when this was but pretty sure it was pre 2008. It was clear from the bank statements that Natwest were deliberately compounding charges on charges to create a larger debt. My guess is that by doing so the tax break on writing off the debt would cover the true sum outstanding - actually very little indeed. About 500 quid from memory. Which got to thousands.

I go the authority for the debt collectors to speak to me. I also got a draft letter off the interweb that the clients sent to the debt collectors to say that they were being harassed unfairly and that if the debt collectors didn't cease and desist then we would see them in court.

The debt passed for spurious agency to spurious agency as it was sold on. I had several calls with nasty people whom I cornered with the numbers and the letters from the client. This went on for a couple of years.

The debt was eventually written off in full and the clients credit history cleared.

RBS / Natwest were absolute bastards throughout. Don't get me wrong, people should pay their debts, but this case was a revelation.

Bayard said...

I have a similar story about Naziwest. My brother made an agreement to pay off a loan from them at a fixed sum every month, which he was going to pay by standing order. Because of a delay by Naziwest in setting up the standing order (this was in pre-internet days), the first payment was late, and Naziwest duly fined my brother, but didn't inform him they'd done so. This meant that the payments now didn't clear as much of the debt as they should have done and so he was fined again, every month and charged interest on the fines. When the original debt had been paid off, the standing order expired and Naziwest wrote to my brother asking what he was going to do about paying off the remaining debt, now in the thousands. My brother refused to pay anything, saying it was all spurious, but the bank refused to back down and went on harassing him and racking up the debt. As a family, we held quite a large number of accounts with that branch of Naziwest and we were on the point of going into the bank en masse and cancelling our accounts when they caved in. It was a pity, really, I was looking forward to seeing the manager's face.

Shiney said...

Which is why we have paid out all our debt.

Mark Wadsworth said...

L and B, thanks for anecdotal. What limited experience I have of RBS is that they treat small businesses like shit.

S, which is a nice position to be in! But better to be in business using bank money than not be in business at all, that's the point.