The Miliband bridging benefits
There are numerous things in life that irk me to the point that I feel like I need to convey my annoyance to anyone who will listen…
Section: Features
There are numerous things in life that irk me to the point that I feel like I need to convey my annoyance to anyone who will listen…
Why has no-one yet invented a TV remote control that has a built in locator which beeps when you whistle (remember the key rings from the 90’s)? Why is stamp duty structured in such a stupid way (and why isn’t there a discounted rate if you live in London)? Why does flat packed furniture no longer have written instructions, but instead provides a series of pictures which bear no resemblance at all to the item you have actually purchased?
All of these things are irksome, however the thing that has bugged me all week long, and which I can no longer keep to myself, is Ed Miliband – or, to be more precise, Ed Miliband’s statement that he will increase competition in the banking sector by imposing market share caps on the Big 5 (Barclays, Santander, RBS, HSBC and Lloyds) and force them to dispose of branches to allow competitors to purchase these branches and flourish.
There are two annoying things about Miliband’s statement (and his equally moronic pronouncements on the energy companies recently).
Firstly is the fact that these announcements are made subject to the findings of some committee which has yet to undertake or finalise its work into this area (in this case, the findings of the Competition and Markets Authority). In other words, wiping millions of the share prices of banks (a sizeable stake of which is now owned by the taxpayer) before anyone has concluded whether the idea is remotely a good one or not.
The second annoying point is the fact that the policy is most certainly not a good one – and it really shouldn’t take an investigation by anyone (never mind the Competition and Markets Authority) to figure this out.
The only bright side I can see to this policy is (from a purely selfish perspective) that it will help the bridge lending industry, as well as the overall alternative finance industry – and of course Funding 365 will be a beneficiary of such a policy.
I am not a political animal – I tend to side with policies rather than with parties - but it is clear to me why this Miliband policy is simply not worthy of a vote given what his objectives are in relation to the banks, and what the result of his policies will be. In short:
a) Miliband wants to bring more competition into the banking sector to reduce the dominance of the Big 5 banks. His policies simply won’t do that – limiting the size of some institutions does not mean that others will grow, particularly when the playing field is not level;
b) Miliband wants to increase the offering and services to customers by reducing the number of branches that incumbent banks have. His policies will result in numerous branch closures – leaving local customers un-banked; and
c) Miliband wants his policies to decrease borrowing costs and increase lending capacity. His policies will do the opposite – loan costs will go up and lending capacity will fall.
To be a little bit more specific about the above, let’s think through what would actually happen should Labour get its way with the above policies. Let’s imagine that specific market share caps are imposed and that e.g. Lloyds / HBOS get close to its limit. What is the first thing that the executives at that bank do? They simply look at the branches they have, the loans they have, the companies that they bank and the customers that they lend to – and then they figure out which ones are the least profitable and which ones require services that are inefficient from a cost/benefit perspective (bank branches in rural areas anyone?). You don’t need to have a double first from Oxford to figure out that these costly branches get closed, loans to customers who are unprofitable (or at least, not profitable enough to meet the market share cut-off) do not get rolled over and loans are not written to new customers.
That seems like a fairly logic fact pattern so far. Miliband policy supporters would, at this stage, argue that all of the above companies that get unbanked and the closed branches would simply be snapped up by a new competitor bank. Let’s address that point straight away:
a) Why would a new entrant want to pick up the companies and customers who had been cut loose by the Big 5 banks because they were not profitable enough? The only reason they would want to do so is if they can re-price the loan, making it considerably more expensive than it previously was when banked with one of the Big 5 (which, incidentally makes a mockery of Miliband’s “cost of living crisis” argument for targeting the banks in the first place);
b) Why would a new entrant want to pick up a network of bank branches? While bank branches provide an important service to some customers, I think we all realise that internet banking has dramatically reduced the need for standard banking transactions to be conducted in-branch. Let’s look at the new banking entrants in the UK. Aldermore, Shawbrook, Kent Reliance and Metro Bank. Out of these four, only the latter is really focused on growing bank branches (and at only 25 branches in London, this is a drop in the banking bucket); and
c) New bank entrants have significantly higher capital and liquidity requirements (in relative terms to their size) than the established Big 5 banks do. While this is a non-level playing field, it is an entirely appropriate one. One of the benefits of being large is the diversity that this brings. A bump in the road can be shrugged off easily by a behemoth, but can sound a death knell for a mere minnow. This additional capital and liquidity requirement essentially means that for every £1 of capital that a Big 5 bank has, it can lend more money, and at cheaper rates, than a new entrant can.
So, it seems pretty clear that Miliband’s policy will actually result in unbanked customers, more expensive loans, fewer bank branches, and have actually done nothing whatsoever to encourage new banking entrants.
While I don’t disagree with the notion of increasing competition in the banking sector, this must be addressed by making this a compelling investment case for new banking entrants. This would likely require a generous taxation policy for new banks and the investors therein as well as dedicated regulatory resource to allow new entrants to cut through the red tape.
So, what has this all got to do with bridging I hear you ask. Well, my belief is that if Miliband’s policy was implemented, there would be a wave of companies and individuals who would be pushed into the alternative finance space, which obviously includes bridge financing. Think through what happens to a company where its bank refuses to roll over a loan. In this case the only logical conclusion (other than bankruptcy) is that asset sales will occur – and as we all know, commercial property purchases (particularly at auction) frequently require bridge financing. In the case of buy-to-let landlords, the increased loan interest rates will (particularly with a generally increasing interest rate environment) make buy to let a loss making proposition – this again will result in property sales which may require bridge financing.
So, while I can’t bring myself to support this particular policy announcement, I can sleep at night knowing that if it was to be implemented, I think we (and the bridging industry in general) will benefit from it.
By Michael Strange, Director, Funding 365 Limited
Keywords: Michael Strange, Funding 365, bridging lender, Ed Miliband, stamp duty, competition, banking sectorr, Barclays, Santander, RBS, HSBC, Lloyds
Source: Bridging & Commercial — https://bridgingandcommercial.co.uk/the-miliband-bridging-benefits