Ebook From Feast To Famine The Rationing Of Consumer Credit In The Financial Crisis
The scale of the unprecedented financial crisis and the speed with which it has spread from the UK’s wholesale financial markets to the high street (as they say in the USA, from Wall Street to Main Street) suggests that radical action is needed to protect consumers. The sudden, reduced availability of affordable credit (both mortgage and unsecured) is of particular concern.
An unsustainable credit boom was allowed to develop in the UK . But that credit bubble has burst . Lenders have belatedly rediscovered prudence, or at least had prudence enforced on them by capital markets, and there is a risk that the effects of this self imposed prudence could be exacerbated by regulation as lenders are required to hold more capital on their balance sheets. A return to prudent, sensible lending is overdue and it is reasonable to ask how and why regulators allowed lenders to indulge in so much reckless lending.
We are seeing a significant change in the way that consumers at all income levels are having or will have to deal with their finances. While it is true that past lending excesses need reining in and there is a need to move from a debt to a savings culture, it needs to be recognised that access to affordable credit is essential for struggling households to make ends meet. The combination of the credit crunch and a deep recession makes it important that the transition described above is carefully managed. The turning off of the credit pipeline is having a serious impact on many consumers and society more broadly . The effect on the housing market is the most obvious impact. More generally, consumers without a savings cushion to protect themselves from adverse financial circumstances may still need access to fair, affordable credit.
With mainstream lenders becoming more risk averse and rationing credit by applying tighter lending criteria, it seems inevitable that financial exclusion will grow and more consumers will be pushed into the non prime markets1 or denied access to credit altogether. There will be a high price to pay. Without access to fair, affordable credit, vulnerable consumers will: be denied the choices many of us take for granted such as the ability to own our homes; face high lending costs and unfair terms and conditions APRs in the sub-prime sector are punitive; be exposed to scams and aggressive practices from unscrupulous financial services firms claiming to offer solutions to desperate consumers.
The Government has mounted concerted action to rescue the financial system and protect the savings of ‘Middle England’ by raising the level of deposit protection schemes. This is understandable as confidence in the financial system is paramount. Similar concerted action is now needed to protect vulnerable consumers without savings who need access to fair, affordable credit or who may already be in serious debt.
There are no easy answers but we believe that policymakers, regulators, the financial services industry and civil society should have two main objectives: improve and enforce the existing consumer protection regime and take action to ensure that lines of credit are kept open for vulnerable consumers. We have set out some ideas for improving the consumer protection regime .
In terms of maintaining access to fair, affordable credit, the broad options available to policymakers are easy to identify, although some of these may be ruled out as being politically impractical in the current environment. In this paper we suggest consideration of the following options:
- regulatory models to encourage lenders to lend2; alternatively, the Government could underwrite loans to ‘riskier’ borrowers both of these are happening to some extent.
- universal service obligations: the Government could force banks to lend to ‘riskier’ borrowers,in effect regulating banks as if they are utilities. An alternative to this would be for the Government to set down annual performance targets for banks with regards to loans particularly for those banks in which the taxpayer has a stake.
- ‘national’ bank options: the Government could take the previous option a stage further and lend directly through the banks it has a stake in in effect turning these banks into mortgage and loans versions of National Savings and Investment.
- promoting and supporting alternative lending channels: the Government could increase the financial resources available to non-profit lenders, including government, through the social fund. The Post Office, credit unions and other community based lending organisations could be used as alternatives to commercial lenders.
This pamphlet puts forward ideas to stimulate debate rather than offering a definitive roadmap. A considerable amount of work would need to be done to: quantify the level of consumer detriment that might arise from the financial crisis; identify the proportionate response; understand the changes to the regulatory framework needed to implement any of these options; and develop a policy framework to allow the Government to reconcile the competing objectives of ensuring taxpayers receive a reasonable return on investment from their stake in banks while providing credit to borrowers perceived as being risky. The key point is that all options should be considered as a matter of urgency, given the severity of the financial crisis.
Contents
Summary
Introduction and background
Section 1 - The years of plenty
Section 2 - The bubble bursts
Section 3 - A heavy price to pay
Section 4 - Possible solutions
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