Wednesday, October 17, 2012

From the regulators don't get it file: "Banks should be thanked for helping struggling homeowners"

Periodically an article appears that shows that financial regulators truly do not get it.  The Telegraph ran such an article in which the UK's most senior banking regulator observes that big banks should be thanked for helping struggling borrowers stay in their homes.

The question is where to begin in debunking this ridiculous observation.  I'll use the advice that Alice was given by the Queen of Hearts to begin at the beginning and continue to the end and then stop.

The beginning:

Andrew Bailey, chief executive designate of the Prudential Regulation Authority, said lenders use of "forebearance" to allow individuals and businesses in financial difficulty to continue servicing their debts meant they deserved the publics' thanks. 
Excuse me, given how much public money has been poured into the banks directly, think bailouts, or indirectly, think low interest rate policies, it is the banks that owe a thanks to the public.
"Let me say something unusual now: I think that the banks deserve a thank you for the way in which they have sought to use forebearance," said Mr Bailey.
The Bank of England estimates about 8pc of UK mortgage debt is in forebearance, or about £100bn of home loans, meaning the borrowers have been allowed some form of forgiveness on payments through switching from a capital repayment product to an interest-only loan, as well as other concessions.
Forbearance has been used by the banks to hide all the bad debt on and off their balance sheets.  With regulatory forbearance, banks have not had to recognize upfront the losses on all this bad debt. What the banks have done is to push the losses into the future.

Everyone knows this and everyone wonders just how much bad debt the banks are hiding.

Regulatory forbearance is not a positive for borrowers.  Its existence does not result in the banks restructuring the loans to a level that the borrowers can afford.  All its existence does is make the borrower a debt slave of the banks.

Mr. Bailey is effectively portraying the bankers as voluntarily writing down debt when in fact the bankers have been doing everything they can not to write down the debt and realize the loss.
Mr Bailey, who is currently head of the prudential business unit at the Financial Services Authority, will from next year take responsibility for ensuring the stability of Britain's banking system....
His comments show him to be a truly bank friendly. Is this a characteristic that a bank regulator should have?
he said he was "impressed" by the efforts of banks to take steps to ensure struggling borrowers were given help to avoid defaulting on their debt. 
"Sometimes the medicine could be hard, but there are many companies around today that would otherwise not be employing people," he said.
Zombie corporations that are kept alive by banks engaging in extend and pretend.  Zombie corporations that are focused solely on making payments to the banks and therefore engage in activities that are damaging to the real economy.

Mr. Bailey assumes that no one else would be interested in keeping the companies running if the debt owed by the companies was reduced to a level the companies could afford.  He also leaves out the number of people who would be employed if the debt were reduced, but have lost their jobs to maximize the companies ability to make payments to the banks. 


creditplumber said...

Tweeted something very similar this morning. An absurd proposition. However, my point was that banks, lawmakers and regulators have colluded on forbearance. They were all aware that crystallising mortgage losses would only flash price discovery indicator to surrounding homeowners. This would have caused confidence to drop further off the cliff.
The fact Bailey says what he does is scary.

Richard Field said...

Agree with everything you said except for causing confidence to drop further off the cliff. I think the ongoing policies to 'hide' the losses are damaging to confidence.

The only way out of this mess is to bring price discovery back.

It really helps when buyers are not concerned that they are overpaying by 20%.