Saturday, 11 October 2008

UK loan write-offs - the storm that has not yet come

The current crisis afflicting UK banks is hard to see in recent loan write off data. The amount written off during the second quarter of this year was about ₤2 billion. It is large number but it is only marginally higher than earlier quarters.

In terms of total loan write-offs, consumer credit accounts for the majority of credits going bad. Only about ₤367 million worth of corporate credit was written off during the second quarter. Lending to individuals is a risky business.

The composition of consumer write-offs is quite interesting. Within this category, credit cards, overdrafts and unsecured loans accounts for about 97 percent of all bad loans. Losses on secured consumer lending, i.e. mortgages, have been minimal. In the second quarter banks wrote off only ₤57 million.

Going forward, this could change. Although mortgage lending hasn't generated much by way of bad loans in the past, it accounts for at least 80 percent of total consumer lending. It won't take much of an increase in the mortgage default rate in order to have massive impact on UK bank balance sheets.

It is the storm that has yet to come.


Mark Wadsworth said...

I used the same BoE figures that you used for your negative-eqity-o-meter to estimate total losses to UK banks from house price crash and arrived at the relatively modest figure of 3% write offs/irrecoverability for mortgage lending, call it £40 billion, absolute worst case.

Mortgage lending accounts for 84% of total household borrowing, i.e. the non-property related bit is £224 billion, what will the write odds on that be? 10% perhaps, called it another £20 billion.

That's £60 billion in total, call it £1 billion a month for the next five years?

From the point of view of banks these are not life-changing amounts of money. Provided they can swap 0.5% of their bonds for equity every month (or whatever dwindingly small figure it might be), it will all sort itself out, lessons will have been learned etc.

dearieme said...

Plus, Mark, if we re-introduce debtors' prisons, the problem will decrease.

Anonymous said...

Nice stuff as usual Alice.
I would take some issue with what Mark says though. Obviously there is more at stake than 60 billion, because his conclusion is that there is no reason to panic.
But everybody is panicking.
What about commercial loans? Leveraged buy-outs?
Given that his conclusions are totally at odds with what you can be freely observed by all on a daily basis you must accept that his base facts/reasoning are wrong.
Our external debt is over a trillion. Where is this figure for example ? How can the banks collectively pay a billion a month when they are likely to be running at a loss for years ?
UK savings just disappeared in Iceland. This money would have been used to repay debts in the UK, the default rate whatever it was, just went up. Why a 10% default rate when we are entering a recession ? Why not 30% or 40%?

Mark Wadsworth said...

Anon, people are panicking because gummints world wide are telling people to panic!

Yes, there are losses, which will have to be split between the borrower (whether business or reckless but-to-letter) and the lender. But no house has to be demolished, no business has to go under, no bank has to fail. All that happens is that people's nominal wealth is not as big as they thought it was; the real wealth, physical, social and intellectual capital, on the ground does not have to change one bit.