David Prosser's Outlook: The banks deserve a day in the sun, but this sub-prime winter isn't over yet

Savers feel anIcelandic chill; A makeover for empty buildings?
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The Independent Online

There won't be too many people who begrudge Andy Hornby and his fellow directors the large paper profits they made yesterday as HBOS shares surged along with the rest of the banking sector. Mr Hornby suffered last week at the hands of speculators who sold his bank short in order to benefit from malicious gossip. Yesterday, he got his own back as shares in British banks reacted so favourably to JP Morgan's much-improved bid for Bear Stearns.

Yet sometimes it seems as if stock market investors inhabit a different world to the rest of us. Anyone screening out news other than the fortunes of the FTSE 100 might now be forgiven for concluding that the credit crisis is over. Bear Stearns is worth five times as much as we thought before Easter and the market has reacted accordingly. All is well with the world once more.

If only it were that simple. While bank shares were making merry yesterday, the newsflow coming out of the very place where this whole sorry mess began was grimmer than ever. American house prices fell by almost 11 per cent in January. The US housing crisis remains in full flow, with a new survey on consumer confidence suggesting that the man on Main Street now feels more downbeat than at any time since the beginning of the Iraq war five years ago.

Home sales data published on Monday in the US had suggested that the housing market might finally be bottoming out. That sense of optimism lasted less than 24 hours, with every other economic indicator pointing towards a recession in America that has already begun. Cue yet more defaults on home loans, both sub-prime and blue chip.

Against this backdrop, it's difficult to understand how UK equities performed so well yesterday (though some of it was a catch-up on Monday when markets that opened posted strong gains). Until it's possible to call the bottom of the US housing crisis, it's impossible to put a value on the mortgages that underpin all those toxic securitisations.

Mr Hornby and his executives bought their shares as a vote of confidence in the bank. Quite right too – HBOS is a conservatively managed bank with excellent long-term prospects. Still, the bank's directors would be well advised not to start spending yesterday's profits just yet.

Savers feel anIcelandic chill

The Icelandic central bank's unexpected decision to raise its base rate to 15 per cent yesterday might seem a little local difficulty. But for several hundred thousand British savers, the woes of Iceland's biggest banks are highly significant.

Two of Iceland's three banking powerhouses have made aggressive launches into the UK savings market over the past 18 months. Both Landsbanki, through its Icesave unit, and Kaupthing, trading here as Kaupthing Edge, have picked up impressive numbers of British customers by paying savings rates that consistently top the best-buy tables.

These banks now face higher borrowing costs in their own country and further speculation about the health of the Icelandic economy – both concerns have already hit confidence in Iceland's banking sector, which is feeling the full force of the global credit crisis.

In this context, it's worth pointing out the small but important difference between the ways in which British savers with the two banks are protected.

In both cases, savers with less than £35,000 in their accounts would be fully covered in the unlikely event of the banks going under, just as they would be were a British bank to collapse. But while Kaupthing is a fully fledged member of the UK's Financial Services Compensation Scheme (FSCS), Landsbanki customers are protected through the passport system under which many European Economic Area banks operate in this country.

In practice, this means that if Kaupthing were to go under, savers could claim directly from the FSCS, while victims of a Landsbanki collapse would first have to apply to the equivalent scheme in Iceland, which has a maximum pay-out of £16,300. Additional losses would then be claimed from the FSCS.

This is not to say there is any prospect of either bank going bust – both institutions remain well capitalised and recently passed stress tests conducted by the ratings agency Moody's with flying colours. Nor would savers at Landsbanki be any worse off than those at Kaupthing, in the longer term at least. However, those with larger sums invested with the former bank would almost certainly have to wait longer to receive their compensation – and they would have to deal with the Icelandic authorities.

In a different era, these hypothetical concerns would have worried only the most cautious of savers. Post-Northern Rock, however, they have much greater relevance. It has never been sensible to save more than the maximum compensation scheme pay-outs with a single institution, but a surprising number of people with very large deposit account balances routinely flouted such advice. This sort of complacency is now misplaced.

A makeover for empty buildings?

For the Treasury, a revamp of the reliefs on business rates available to owners of empty buildings must have seemed like a handy way to raise £1bn. When the Chancellor announced his plan to scrap empty rates relief a year ago, he presented the measure as a way to revive high streets and town centres, not to mention deserted industrial areas that should be redeveloped.

Yesterday, however, the Local Government minister, John Healey, had to fire a warning shot across the bows of Britain's commercial property companies, which are furious about tax changes that will cost them £950m in the 2008-09 tax year alone.

Mr Healey promised a zero tolerance approach to companies that seek to circumvent the new rules. What he meant was that the Government would not back down in the face of threats from property developers to leave the roofs off unlet new-builds or even to reduce empty buildings to a pile of rubble.

The reforms are certainly swingeing. Currently, owners of industrial property pay no business rates on empty buildings, while owners of unlet commercial premises, such as shops and offices, pay nothing for three months and then only half the full bill. From next Tuesday, however, the industrial relief will be available for just six months, while the discounted period for commercial buildings comes down to three months.

Mr Healey's suspicion is that the current regime encourages property companies to leave buildings unlet, reducing the supply of premises to other businesses and forcing up rents. This, the Government argues, also leaves many communities full of unused, boarded-up buildings that are a blight on both the local economy and the environment.

So will the new rules have the desired effect? Not if the property sector is to be believed. Companies such as Segro and Brixton Estates say their response to the higher tax charges is more likely to involve leaving the roofs off unfinished buildings or demolishing properties earmarked for development ahead of schedule. In which case, they'll avoid the business rates on such sites while local communities have to put up with ever greater numbers of eyesores.

Some of this is bluster. But the Treasury's approach to empty rates relief ignores some basic economic logic. If the owner of a commercial property is able to earn a decent yield on a building, it will do so. Premises remain unlet because owners can't find tenants prepared to pay a rent that represents a decent return, not because of some sinister conspiracy to restrict supply.