Bank warns against lending too cheaply

PETER RODGERS

Financial Editor

The Bank of England yesterday warned banks not to lend too cheaply or easily because it could store up problems that would come home to roost during the next economic downturn.

Pen Kent, an executive director of the Bank, told a conference of bank credit managers that temptations were growing ever stronger to relax banking standards in order to maintain or increase market share.

Banks were under pressure from corporate borrowers to lower their standards of risk assessment, pricing and monitoring, as customers demanded cheaper loans with fewer restrictions. But Mr Kent told the bankers to take more care in all three areas.

Despite warnings by the Bank, pressure from customers for easier terms had led to a further weakening of loan covenants over the past 18 months.

Covenants are the clauses in loan agreements which set minimum performance standards which the borrower must meet. If they are broken, the bank has the right to renegotiate the loans. But many banks are agreeing to easier covenants to keep or attract customers, said Mr Kent.

He added: "The temptation consequently grows ever stronger to relax some standards for the sake of improving or even maintaining a presence in the market.

"In many ways there are parallels between the credit function and the Bank's own monetary policy objectives. Both must resist short-term temptation for the sake of avoiding pain months or years ahead. Both must monitor for any sign of over-heating and take action to rein back as appropriate."

In several businesses such as property, which has had a difficult recent history, cross-default clauses and other penalties were being negotiated away altogether, he said.

Borrowers who insisted on this did themselves a disservice because they scared away the best lenders. Sensible covenants benefited both sides.

Mr Kent said companies were turning to the securities markets for money, or borrowing from large numbers of banks at the same time. He warned that one of the common features of the big company collapses of the last recession was the large number of lenders involved with each company.

They proved to have little knowledge of the borrower and even less loyalty when it got into difficulty. Borrowers should keep the number of banks with which they dealt as low as possible.

The Bank is also concerned at a fall in the amount of security taken for loans, and an increase in non-recourse loans to projects, that are not guaranteed by the parent group. He told bankers to enter these high risk situations with their eyes open. Risk had not been priced rigorously enough, he said.

Mr Kent backed a trend under way towards smoothing the cycle of bank profits and losses, by setting aside money to pay for defaults in good years, based on analysis of what the cost will be in the bad years. Most banks wait until loans go wrong before they set aside money to pay for bad debts, which exaggerates the swings in profits.

Comment, page 21

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine