The Financial Services Agency has just published their Financial Risk Survey for 2008. As you would expect, the report is full of obtuse, convoluted phrases. Such reports leave the reader bewildered and confused about potential risks. The purpose is, afterall, not to enlighten but to obscure the dangers.
Today, I had too much time on my hands. I actually sat down and read this report. I have chosen my ten favourite lines and decoded them in the vain hope that we can all have a slightly better understanding of financial sector vulnerabilities going forward.
1. The recent tightening in financial conditions may have exposed some firms’ business models as being potentially unsuitable in more stressed financial conditions where, for example, access to liquidity is restricted.
The banks have taken on way too much risk. Now the banks are struggling to get cash.
2. The structured finance vehicles that some firms have chosen to use over the last few years have had a material impact on their financial performance during stressed financial market conditions.
The banks have been producing new financial products that we could not understand. It turns out that the banks didn’t understand them either.
3. Despite the more difficult economic and financial conditions, firms must not divert attention away from focusing on conduct-of-business requirements and our high-level principles.
The FSA better watch the banks more closely because they seriously starting to misbehave.
4. Market participants and consumers may lose confidence in financial institutions and in the authorities’ ability to safeguard the financial system.
The FSA can not afford to screw up like it did with Northern Rock.
5. Financial market conditions weakened considerably in 2007 as investors reassessed risks in their portfolios and risk premia began to rise.
The sub prime crap hit the fan in August, and now everyone is running for cover.
6. Tighter credit conditions are likely to add further risks to the growth outlook as consumers’ ability to spend and finance their house purchases comes under pressure.
The UK housing market is going to crash and it will take the economy down with it.
7. If consumers found it increasingly difficult to obtain credit, the number of property transactions would be likely to fall and the market for mortgages for own-house purchase would therefore become smaller. However, the demand for re-mortgaging and second charge lending could rise, particularly as consumers consolidate debt.
When it crashes, consumers are going to try to keep on borrowing, digging themselves into an even bigger hole. They are addicted to debt and there is nothing anyone can do to save them.
8. As commercial and residential property prices fall, financial firms with high concentrations in this type of lending could face losses which require an increase in provisions on both the residential and commercial property books, thus reducing profitability. This could put firms’ capital under pressure.
When the market crashes, the banks will be in serious difficulties. Some of them might go down the same hole that Northern Rock is now exploring.
9. Banks and other lending institutions might need to increase their provisions to account for consumers having difficulties in repaying their mortgages and unsecured loans due to a fall in their disposable and real incomes. However, changes in interest rates would give financial firms greater opportunities to widen margins to maintain profitability.
Please send a memo to the MPC begging them to cut rates. Many households are about to stop paying their debts. The banks are in trouble and if rates don’t come down, banks won’t be able to make enough money to cover the losses.
10. Over the course of 2007 there was a transition from a situation where there was overconfidence in the market to the current situation where confidence is low.
The FSA have failed miserably to prevent a financial crisis. While it may be our fault, we will push the blame onto overconfidence. As far as we know, overconfidence has absconded, and he won't be coming back any time soon.