Jeremy Warner's Outlook: Only blue-chip householders need apply, Halifax tells new mortgage applicants

Arnold calls for more change at UBS
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The Independent Online

Now even Halifax, Britain's largest mortgage lender, is handing out the ration books.

Three "loan to value" bands are to replace the current two, with charges calibrated accordingly. The top band of 90 to 95 per cent will pay the most, while you will have to put up 25 per cent or more equity to pay the least. At the same time, Halifax is raising its charges for new mortgages by an average of 0.12 per cent. Higher risk loans will pay 0.35 per cent more, though low risk ones will pay marginally less.

If you want a 100 per cent mortgage, forget it. You won't get one from Halifax, or anyone else by the look of it. All this is occurring against a backdrop of falling interest rates and is powerful evidence of the impotence of policy in the face of the sobering effects of the credit crunch.

Halifax excuses its actions as the reintroduction of more prudent, risk-adjusted lending practices after all the years of plenty, when the price of mortgages was bid by the excessive availability of credit down to ridiculously low prices. Yet this is by no means the whole story. As capacity for writing mortgages shrinks, those still open for business are finding themselves swamped with applications. First Direct has chosen to deal with the problem by shutting up shop and withdrawing from the market entirely.

Others, such as Halifax and Nationwide, are toughening up their criteria and raising their rates. Even so, they may struggle to deter demand.

One of the biggest mortgage providers in the market last year, Northern Rock, is now out of the equation altogether. At its peak, the Rock was responsible for one in every five mortgages sold, expanding its book hell for leather even as everyone else was trying to reduce theirs.

This particular sponge has now gone. Worse, Northern Rock is doing all it can to persuade its mortgage holders to go elsewhere, so as to produce the cash to pay off the Government's loans. The Rock's determination to shed mortgages promises to produce a perversely upside down form of competition, where rivals compete to have the highest prices rather than the lowest.

A dangerous upward spiral in charges is threatened that will only accentuate the size of the impending housing market downturn. It is an unfortunate truism of the banking cycle that while the banker's propensity to lend exaggerates the boom when credit is cheap and easy, it also accentuates the bust when credit is scarce.

As policymakers claw over the lessons of the present banking crisis, this must surely be one of the biggest. The focus in monetary policy on narrow inflation targeting has allowed an unsustainable credit boom to develop which in turn has fuelled a series of asset bubbles.

Already the call has gone up on both sides of the Atlantic for more rigid forms of credit control. What goes round comes round, and it may be that some previously tried, tested and failed policy instruments are about to be revisited. The following little history lesson is drawn from the Bank of England's own website.

"In 1971, the UK moved to a more market-related monetary environment under a policy known as Competition and Credit Control. The former quantitative ceilings on bank lending were lifted and interest rates were allowed a larger role in the allocation of credit.

"This coincided with a period of fiscal expansion and rapid growth of demand in the economy, and monetary expansion was also rapid as banks increased their lending and competed in the interbank market for deposits.

"A form of quantitative control was reintroduced in 1973 in the form of the Supplementary Special Deposit Scheme, also known as the 'Corset'. It imposed penalties on banks whose interest-bearing deposits grew faster than a pre-set limit. The Corset was abolished in 1980."

Time to bring back something similar? It's going to be an interesting debate.

Arnold calls for more change at UBS

With Luqman Arnold, it is as much personal as financial. One of a series of UBS chief executives who were ousted by Marcel Ospel, UBS's long-standing chairman, Mr Arnold plainly has more reason than most to agitate for change at his former charge.

Yet though the 0.7 per cent stake he has built up through Olivant barely earns him bragging rights as an activist investor, the $470m outlay is a big bet for him and his backers and is self evidently motivated by more than just malice.

To some extent, the UBS board has already shot his fox by getting rid of the autocratic Mr Ospel and raising new capital through an underwritten rights issue. Yet as Mr Arnold points out, there is plenty more to be done, and he may be right in thinking UBS needs more capital still.

The board structure that Mr Ospel put in place to maintain his power and influence in the bank – and in particular the mixing of supervisory and executive board functions – remains intact and is in almost every respect a corporate governance travesty. It is reasonable to assume that this structure led directly to the calamitous losses on sub-prime market and other forms of questionable debt, as responsibility for risk management lay in the chairman's office within the supervisory board. No adequate non-executive checks on risk assessment therefore existed.

What's more, the new chairman, Peter Kurer, succeeds to the exact same role as executive chairman as Mr Ospel has been occupying. Mr Kurer, though by all accounts an outstanding general counsel, is in any case, quite plainly ill-qualified for the role.

As Mr Arnold points out, what's needed is an external candidate with proven strategic, risk-management and communications skills. Mr Kurer's appointment merely perpetuates the incestuous juggling of positions internally at UBS which allowed risk taking to run amok.

Mr Ospel apparently believed that house prices would never go down, but even assuming this was a reasonable view to hold, the degree of exposure he allowed to this single asset class beggars belief. It is not enough simply for the commander to fall on his sword. Failings in governance structures need to be addressed too.

Mr Arnold is also surely correct in thinking that the "one bank" approach, where the company's private and investment banking entities are operated as a single brand, is flawed. The hugely valuable private banking franchise has been severely harmed by the losses so recklessly chalked up in investment banking.

Yet the solution is not, as apparently now being pursued, to ban all risk-taking in investment banking. That will only destroy the investment banking franchise too as the best people fold their tents and go elsewhere. Rather it lies in more effective risk management.

The rigid separation between investment and private banking Mr Arnold proposes, with the latter fully ring fenced from the risk being run in the former, makes a lot of sense.

That way, traditionally minded depositors who look to Swiss banks for rock solid reliability can be sure their money is safe. It must be intensely irritating for the UBS board to be lectured by a former colleague, but they should swallow their pride and listen. He talks much sense.

All that said, Mr Arnold may be pushing on at least a partially open door. The art of the activist is to target troubled companies at the point when they are of necessity ready for change, and then claim all the credit for actions which very probably would have been pursued anyway. The mistake Eric Knight has made in targeting HSBC is that he was too late into the game. The supertanker had begun to change direction well before he arrived on the bridge.

Mr Arnold, by contrast, seems to have got his timing spot on. Much of what he is saying will command widespread support with other shareholders.