What next lenders?

deposit protection scheme irelandHere are some ideas about where we feel banks will go next in terms of the lending market, these are only opinions, whether or not we see any of this coming to fruition can only be told by time.

1. Early Redemption Bonus: Early redemption means ‘paying off your mortgage early’, in fact when you switch your loan this is what happens, or when you clear it entirely. Why would a bank offer you a cash bonus for actually moving your loan away from them though? Or for paying it off? Isn’t the idea that you pay lots of interest?

Actually that’s a mixed answer, normally it would be ‘yes’, banks want you to keep paying interest over time, but now we are seeing a few things that we have not seen before. Firstly are negative margin loans, if you have a tracker of anything less than ECB + 1.5% (ish) then the likelihood is that the bank is not making any money on your loan after their operational cost, therefore it may be worthwhile to give you a monetary incentive to redeem, basically pay you for getting out of their debt so that they don’t carry this loss making loan.

redemption bonusAs well as that it will help to give them some liquidity, the first bank to do this are probably going to be the smartest because if they can get loans that are basically non-performing even when the client pays then it will help to solve a huge ongoing balance sheet problem. Market share lost is not the name of the game today. So we’ll probably see Early redemption rewarded in one of two ways, firstly you get cash back or secondly you can opt to get money off of the amount you owe if you clear the loan.

It used to be ‘redemption penalty’ and ‘redemption fee’ but now that behaviour is likely to be rewarded, funny how a credit crunch changes the physics of the money market!

The name of the game is to raise capital, get liquidity and funding, and if you can find some profitability in there then so be it, but profit is no longer the driving force in banking, its capital and liquidity. We have seen many bank staff being pulled from mortgage and selling duties get cast into deposit roles because cash is required in the current environment.

new bank fees introduced2. New Fees!: Banks used to charge all sorts of fees to arrange a mortgage, then one day there was ‘competition’ and competition changed the way things were done, so bye bye Mortgage Indemnity Bonds/Guarantees (MIB/MIG’s), bye bye arrangement fees and bye bye to pretty much everything else as well. However, prime lending is not going to compete in a market that doesn’t reward competition, so the reintroduction of many fees is expected in our view. It will start with some minor fees, move to Indemnity Bond fees for lenders borrowing at a certain LTV and will ultimately lead to ‘arrangement fees’ which is where they charge you for the work of arranging your loan, this was confined only to sub-prime lending until recently. At the moment no prime lender is charging arrangement fees but watch this space!

3. Bigger Bond Margins: As bank equities get hammered to the wall they will raise their bond margins in order to raise capital through the bond market, if you were cash rich now might be the time to spread some love amongst all of the bank bonds on offer, as the returns might be more than any potential dividends.

liquidity contraction4. Dual pricing continuance: Banks are still trying to find margin where ever they can, for that reason any loans that they are willing to give out will (from their perspective) hopefully be direct, that way they can find cash margin on the insurance products, expenses of a loan are normally amortized across the life of the loan, but with the money markets in turmoil what counts more is the ‘here and now’ so this practice of dual pricing (we like to call it ‘duel pricing’) is likely to continue, however, the banks doing it are giving away something without realising it, this practice screams ‘Our balance sheet is in ragged order! We can’t run a good business!’.

4. Ongoing deposit wars: Lenders are still making deposits that are far more attractive than the ECB rates, normally this is not a good sign, deposits are designed only to be a part of a portfolio, when it becomes the main attraction then banks are in essence replacing one fixed interest product with another, literally turning your deposit into a mortgage and hoping that the borrower doesn’t default. The problem with fractional reserve banking is that a bank is required to hold almost none of the actual money on deposit, its a confidence game, they require customer confidence in order to survive, if customers lose confidence it creates the kind of run we have seen with Northern Rock and IndyMac.

In the S&L crisis during the 90’s the most distressed banks were offering the highest interest rates, banks offering high rates are partly revealing that they have bigger issues than other lenders. Banks have to keep a certain capital reserve and when that starts draining because they are losing money they do as necessary to get deposits in to raise capital and remain solvent.

Remember this – the Deposit Protection Scheme covers only a maximum of 90% of your deposit up to a maximum of €20,000 if you have €100,000 in a bank and it goes bang then kiss goodbye to eighty grand. If even a single bank goes bang we’re in trouble, because it’s not totally uncommon for people to have more than 20k in an account. We enquired with the Regulator and found out that the entire deposit protection scheme has only €525 million in it. That is enough to give 25,000 people the full pay out, is it fair to believe that there are more than 25,000 people with more than 20k on deposit? All of the unspent SSIA’s? All of the retired people who got their pension lump sums?

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