HSBC puts mortgages up

Credit chaos is causing banks to raise their lending rates, regardless of BoE policy.

Last Updated: 31 Aug 2010

HSBC became the first major bank to up its mortgage rates, adding 0.3% to the rate required of housebuyers with a 10% deposit to take it to 6.27%, well over the Bank of England base rate of 5%. Earlier in the week, the Yorkshire Building Society increased its rates by 0.4%. Now First Direct and Barclay's mortgage arm The Woolwich have joined in, raising their rates for first time borrowers by 0.2% and 0.35% respectively.

What’s going on? The problem stems from the fact that it’s not just customers that banks are increasingly unwilling to lend to, they won’t even lend amongst themselves. And when banks stop lending money to each other, the whole financial system is at risk of grinding to a halt.

We’ve seen problems in interbank lending before – the credit crunch originally kicked off for pretty much this very reason – but the problem is now more severe than ever before. There is a record gap of nearly 1.5% between the rate at which banks will loan money to other banks for a 24hr period (the overnight rate) and the three-month rate, known as ‘three month Libor’. Before the crunch, the gap was only 0.1%.

The consequence of this is that like a bunch of Dickensian misers, the banks are hoarding their cash instead of putting it out to work. Why? Partly because they are waiting to see what happens to the US rescue plan as it progresses through Congress, and partly because there are still concerns that some of their number may be sitting huge and undeclared write downs from the bursting of the asset price bubble.

You could be forgiven for thinking that 18 months of credit crunch is long enough for them to sort out who owns what and how much it's worth, but such is the complex and tangled nature of modern finance that serious doubts still remain. Either that or they are all hoping for a US style taxpayer-funded rescue over here. (Incidentally, if Gordon Brown was hoping to get some tips from Treasury Secretary  Paulson on his trip to the US this week he was out of luck. Hank was ‘too busy’ to see the PM. So much for the special relationship)

Add to that little lot the new and even more worrying fear that even those assets whose value is currently holding up may slump if we have another week like the one before last and you can see that things are pretty rocky out there.

Some commentators are saying that the only way to really get back to stability is for banks to completely de-leverage – i.e. only to lend out as much money as they have taken in on deposit. That’s all fine and dandy in principle, but getting to that happy position would involve the enormously painful unravelling of decades of economic and financial progress. It might even be enough to cure us Brits of our love affair with bricks and mortar, and where would the banks be then?

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