Earlier this week, the Bank of England launched this year’s ‘stress test’ for UK banks. In stress tests, the Bank (in its role as regulator) asks financial institutions to model the effects on their balance sheet of hypothetical adverse scenarios. If banks find that they are not in a position to withstand these economic shocks, they are required to take steps to strengthen their balance sheets – usually meaning increasing their capital by lending less. This happened to the Royal Bank of Scotland last time around.
This year, banks have been asked to model two scenarios. Its regular test, that was also given last year, involves UK GDP falling by 4.7%, house prices by a third, and the Bank’s interest rate jumping to 4%. A new test is described by the Bank’s Financial Policy Committee as “incorporat[ing] weak global growth, persistently low interest rates, falling world trade and cross-border banking activity, increased competitive pressure on large UK banks from smaller banks and non-banks, and a continuation of costs related to misconduct.” Given that the past year has seen the Brexit referendum, the election of a protectionist in the United States, no change in rates and large fines by regulators, it is the second scenario that seems closer to home.
The results of the tests are expected in November, and are difficult for anyone outside the banks to predict. But what we do know is that one major bank (RBS) failed the first test last year, and British banks have been stung for fines amounting to £50bn since. In addition, the second scenario – though a hypothetical rather than a forecast – signals a real fear on behalf of regulators and the financial sector. Banks, whose lending behaviour has been more cautious since 2008 in any case, have to face an environment in which global trade and growth are under threat due to political factors. They face tighter regulation, in both the form of these tests and the fines they are paying out for past misconduct. The bottom line: big bank lending is unlikely to pick up significantly in the short-term.
But see the other factor mentioned in the Bank’s second scenario: “increased competitive pressure on large UK banks from smaller banks and non-banks”. Less conventional lenders do not face the strict regulation that is (rightly) applied to the most important institutions. They are not so exposed to changes in global trade or politics, and do not generally face the prospect of misconduct fines. It is institutions in these sectors which have been expanding lending of late, and in particular the bridging finance space, with increased lending by 26% in the fourth quarter of last year, and 9.4% over the year as a whole, compared with 2015. As larger banks remain cautious, such lenders become ever more attractive.
This article was written by Matthew Dailly, Managing Director of specialist bridging loan company Tiger Bridging Ltd.
About Tiger Bridging:
Tiger Bridging is a specialist bridging finance provider with over a decade in the market. They provide short term property funding solutions across the whole of the UK, offering bespoke and flexible lending terms.
Their funding is free from the restrictions imposed by larger institutions or the mainstream lenders. Their small stable of valued and fast-moving investors, complemented by a select group of hedge funds, provide a steady and reliable flow of capital to clients. Their culture is bespoke and their attitude is proactive. If the deal makes sense, they can get the funding, regardless of the credit status of the client.
Company Name: Tiger Bridging Ltd
Contact Person: Matthew Dailly
Phone: 0207 965 7261
Address:Kemp House 152 City Road
Country: United Kingdom