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Banks To Be Stress Tested On 35% Drop In House Prices

Banks To Be Stress Tested On 35% Drop In House Prices

Banks Stress Tested On 35% Drop In House Prices
And 5% Rise In Interest Rates

UK and Continental banks are to be stress tested using a worst case scenario in an effort to assess if they could cope with a house price slump of 35% or a sudden spike in interest rates to more than 5%, the exercise will be monitored by the Bank of England.

Sky News broke the story on Monday ahead of an official announcement on Tuesday by the Prudential Regulation Authority (PRA), after learning that banks would be subjected to an armageddon style scenario to see if they have sufficient capital to withstand another economic slump.

A series of commercial real estate losses is expected to be applied to the banks’ balance sheets as part of the tests, but it’s not certain whether or not the interest rate hike will be quantified as part of the tests, but the 35% slump in property prices could reveal if banks and building societies would need to raise billions of pounds of fresh capital to survive, unless they can demonstrate their ability to withstand such a huge slump.

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Mortgage Loan Approvals Increase

Mortgage Loan Approvals Increase

More “Help To Buy” Mortgage Lenders Announced

The number of mortgages given to first-time buyers increased by a third in the 12 months to August 2013 according to the latest data from the Council of Mortgage Lenders (CML), with new entrants to the property market accounting for 44% of all residential property purchases during the month.

The CML figures were published as Barclays became the latest high street lender to confirm it was signing up to the second part of the government’s Help to Buy scheme, which is designed to make more 95% mortgages available to first-time buyers, second steppers and home movers.

Barclays join Santander, RBS, Halifax and HSBC in confirming it will use the taxpayer-backed guarantee to make high Loan-To-Value (LTV) mortgages available for property purchasers, meaning that more than half of UK mainstream mortgage lenders are now signed up to provide more mortgages at higher loan to value ratios.

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UK Funding For Lending Scheme Flops

UK Funding For Lending Scheme Flops

The UK Government initiative to get banks lending again has become a bit of a laughing stock according to some economists.

The funding for lending scheme (FLS) was dubbed a “white elephant” after the first data showed that in the three months to the end of September 2012, just £500 Million (GBP) of lending was released by all the 35 banks and lenders signed up for the scheme, which was launched in August this year.

The funding for lending scheme was supposed to reduce borrowing costs for banks and other lenders, who are required to pass on the lower costs to their customers. But so far the lending appears to be lowering mortgage rates rather than helping small businesses.

Only six banks and building societies have used any funds from the FLS in the three months to the end of September 2012 and their net lending – which takes account of loans being repaid – was negative by £1 Billion (GBP) because customers repaid existing loans faster than new loans were granted.

At three banks, more loans were repaid than new loans actually taken out, leading to negative net lending at Royal Bank of Scotland of £642 Million (GBP) and Lloyds Banking Group took £2.7 Billion (GBP) from the economy during the third quarter while Santander removed £3.4 Billion (GBP).

The biggest injection of credit came from Barclays at £3.8 Billion (GBP), whilst Leeds Building Society added £212 Million (GBP) and Nationwide Building Society £1.8 Billion (GBP).

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