Bank societies in Britain warned that they will have to increase rates on home loans and cut down mortgage lending if the government insists on the full payment of the £300 billion support they have received since 2008.
In a recent paper to policymakers, the Council of Mortgage Lenders (CML) asked the government for its continued support of the Credit Guarantee Scheme and Special Liquidity Scheme, which must be fully repaid by 2014 and 2012 respectively.
The government support to the banking industry is politically related. During the meeting between CML and the Treasury, the industry was told that no solution was probable before the next election.
Ministers may reject the calls to extend the aid as self-interested industry pressure, but several analysts have been avoiding the issue for months, even as house prices have increased and mortgage lending has caught up.
The recent increase in home prices and the improved new mortgage access have obscured the underlying liquidity needs of several banks, said Bob Thomas of the CML.
He added that while lenders wanted to remove some institutions from government support, the transition must be made in a way that would not lead to a sharp increase of costs or a cessation of lending.
“We are not suggesting that government pour vodka in the punch bowl,” he said. “We are asking how government can get the patient to sober up without too much shock therapy.”
It was concluded that while access to funds is limited, lenders cannot keep its existing loan books and make new ones. As investors lost confidence in UK banks and securities aided by British residential mortgages, the CGS and SLS were intended to replace inter-bank loans.
It was also made clear that the retail deposits, which are far more stable, simply cannot grow quickly enough to sustain the wholesale funds, which are being withdrawn.
Between 1999 and 2007, new mortgage lending exceeded retail deposits by £180 billion. “Today, the retail savings market cannot on its own cater for the level of mortgage borrowing demand in the UK,” said the paper.
But more analysts believed that tight competition is making the retail deposits a loss-making business.
“Banks need deposits to improve funding and … are therefore offering attractive rates for long-term deposits,” said MF Global analyst Simon Maughan. “This makes long-term deposits unprofitable.”