Remember the cycle, says the Bank:Comment

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The Independent Online
What terrible spoilsports these bank supervisors are. As soon as the housing market begins to recover - helped by some tremendous deals in which lenders are virtually giving away their money for the first year or two - the Eeyores in the Bank of England's supervision department start having an attack of misery about what its consequences might be.

Last year, the Bank was equally strident in warning about trouble in store on corporate lending, where margins have dropped and covenants have weakened. It is the unfortunate job of banking supervisors to fear the worse. They must act like supertanker captains, high up on the bridge scanning the radars for rocks that the crew cannot yet see over the horizon. One such distant rock could be a spot of economic trouble after a change of government.

As in all business cycles, juicy profits at the top increase the temptation among banks and building societies to forget the lessons of the recent past.

Many banks are reporting returns on capital as high as 35 per cent across their businesses, a level which is not sustainable. What really makes the supervisors worry is that when they add up every large mortgage lender's target market share, it comes to many times 100 per cent of the market. Some of those lenders have costs so low they could wash their faces with a lending margin of 0.28 per cent, and others - mainly banks - require three times as much to break even. The worst-hit in the coming shake-out will be the higher-cost lenders that fail to reach their over-optimistic targets for market share.

Mortgage mania in 1996 could be sowing the seeds of banking industry trouble a year or two hence. There is no suggestion that any of these lenders are going to be seriously threatened by what they are doing now. But lending goes in cycles and there could be nothing worse for the housing market than to find lenders backing out because of shrinking profitability or even losses. There is a real possibility that today's cut-price mortgages will be paid for with much more expensive rates in a few years' time.