B&B – crisis management in action
IF living in interesting times is unlucky then surviving the age of “decisive action” is a curse.
Yet again, decisions over a troubled bank’s fortunes have been made over a weekend surprising markets, customers, employees and observers alike.
The news that Bradford & Bingley, the UK’s eighth largest mortgage lender, was to be nationalised and its £20bn savings business and branch network sold to Spanish banking giant Santander may have been expected but the expediency at such a decision wasn’t.
Under the arrangement, the Government will take control of the bank’s £50bn in mortgages and loans, and shares in the company have been suspended. Any hopes that the Financial Services Authority (FSA) and government advisers may have had over the announcement instilling confidence were dashed instantly as markets responded negatively to the news – not because of the bailout – but because the country’s banking sector would be responsible for the first £14bn of shortfall under the Financial Service Authority’s (FSA) compensation scheme.
The British government isn’t alone in its economic anguish. The Dutch authorities have part nationalised Belgian banking giant Fortis, the Icelandic government forced to take control of Glitnir Bank, while the US waits for an alternative plan of action following the House of Representative’s rejection of President Bush’s proposed £700bn bailout. In the meantime markets continue to tumble in a free fall to beat all others.
But although the nation and the UK’s financial services sector may be smarting from B&B’s collapse, Yorkshire is hurting more than most.
In as many weeks, two of its financial institutions have been rescued at the 11th hour although HBOS’s salvation was in the form of a takeover by Lloyds TSB.
As news of B&B’s nationalisation sinks in speculation has begun over job losses, whether shareholders will receive any payout, and over the long-term impact of the Treasury’s decision to nationalise a second bank.
But questions are also being raised over Yorkshire’s own economic stability. The financial services sector has played a significant role in the region’s impressive growth with Leeds widely regarded as the UK’s second financial centre. The sector contributes some £5bn – that’s around one third – to the economy and employs nearly 300,000 staff.
Core financial services employs around 50,000 in Leeds spread across a number of different sectors ranging from banks, accountants, law firms, building societies, insurance companies and brokers, stock brokers, mortgage and credit processing, pensions advisors and a variety of financial specialist and support services.
However, Tom Voser, chief economist at Yorkshire Bank, is the bearer of more positive news.
“Obviously there are concerns for the financial services sector and its development in Leeds. However, far greater numbers are employed in other sectors despite the contraction of construction sector,” he says.
“But overall the regional economy is strong and we are cautiously optimistic for future growth. The region’s growth will slow down dramatically but it will still grow more than the national average. We’re predicting a 1.1% growth rate compared to 1% for the UK.”
Ironically, it is Yorkshire and Humber’s manufacturing sector that will help boost economic profitability.
“One of the region’s strengths is its manufacturing sector. We have been talking to people in heavy industry and have been surprised at how well they are doing,” adds Voser.
Voser’s positivity however doesn’t detract from the anxiety currently being faced by HBOS and B&B employees. In response, regional development agency (RDA) is bringing together key private and public sector leaders to create an action plan for employment. The RDA is also meeting with Chancellor Alistair Darling to discuss any ideas.
Tom Riordan, chief executive of Yorkshire Forward, said: “We have a responsibility to make those people who are employed by institutions such as Bradford & Bingley a priority.
“We also have a responsibility to support the region’s financial services industry at this time and are meeting with Alistair Darling on Wednesday to decide how we will do this.”
Riordan said that the financial services sector within Yorkshire and the Humber was fundamentally sound and that it had “strong credible institutions”.
“This situation is borne out of the current global financial position and we are working to minimise the impact of that,” he stresses.
“We have real strengths in mortgage processing, savings and insurance services and we believe the demand for these services will endure over the next decade and beyond. Not only do we have a strong infrastructure in place but we have a large university hub with fresh, highly educated, new talent joining the industry each year adding to the already strong skills base in this region.”
John Ansbro, chief executive of Leeds Financial Services Initiative (LFSI), is equally as keen to play down any negative speculation.
“It’s too early to say what impact there will be on jobs in this region and in Leeds. Around 120,000 people are employed in financial and related business services in Leeds and more than 290,000 in the wider city region.
“Leeds is fortunate in that it has strength in breadth and depth of financial services that serve the wider economy in Yorkshire and nationally and internationally. The skills base, infrastructure and capabilities of the financial services sector on Leeds and the wider city region are second to none.”
As with Voser however, Ansbro is quick to acknowledge Yorkshire’s diverse economy saying that Leeds doesn’t have “all its eggs in one basket”. He says that LFSI is working with Yorkshire Forward and other local authorities to support the case for maintaining as much work and employment in the region as possible. But he concedes that Leeds is not immune to the global economic turbulence.
“The current turmoil in the financial markets is unprecedented and we are in unchartered territory so it is not possible to say we are past the worst or not. But steps taken in the USA, in the UK and Europe and generally globally show that there is the resolve and the will to stop things getting worse. The banking sector and national governments are working closely to maintain stability.”
Riordan, Ansbro and Voser’s words may be reassuring but their optimism may be short-lived. According to new figures the number of mortgage approvals fell again in August, although the rate of fall has levelled off indicating that a trough may be nearing.
Nonetheless, with the number of approvals at just 32,000, the current rate is just a quarter of the peak seen in August 2006. And as low approvals impact on the final net lending figures it’s clear that the current rate of new mortgage borrowing is barely enough to keep the stock of mortgages constant.
There was just £143m of net lending secured on property in August – that is 1.6% of the £9.1bn net borrowing in August last year.
The latest M4 lending data also shows that lending to companies is slowing, as firm’s batten down the hatches in response to the economic storm that is blowing. M4 lending to companies stood at £3.3bn in August, down from £7bn in the same month last year.
Consumer spending however isn’t showing such a slowdown. Net consumer credit stood at £1.2bn this August, the same level as August 2007. New credit card borrowing increased in August by £600m, compared to £313m in July and £160m in August 2007. However, how much longer the UK consumer’s penchant for plastic can continue is not clear and with rising joblessness in the second half of 2008 a steady rise in forced sales in the second half of 2008 may put further downward pressure of house prices.
The approvals data underlines that net secured lending in the household sector has ground to a halt, and may even go backwards. And with approvals at record lows, housing transactions look set to be stagnant until the rest of the year.
For Jason Clarke, head of PR at Skipton Building Society, B&B’s nationalisation demonstrates just one thing – that demutualisation simply doesn’t work.
“Skipton has been put under pressure to demutualise many times but has always resisted,” he says.
“I think B&B’s collapse just further proves that demutualisation doesn’t work. In fact not one of the building societies that converted are left. There are a number of reasons.
“Firstly, they involved themselves in areas of business that they had little or no experience of before such as treasury and the wholesale market. Secondly, paying members a windfall was costly and left the newly formed bank with limited liquidity. They also found themselves under pressure to find a niche in the market. In the case of B&B it was buy-to-let mortgages and self-certification.”
Clarke believes that the principles behind the mutuals – lending based on savings – will ironically spread throughout the banking sector.
“I agree that there will be a return to what is called Quaker banking,” he says. “There has to be.”
As the dust settles and the rounds of redundancies begin, thoughts will turn to other institutions on the “at risk” register. Just how many more failures can be mopped up by public and private sector is another issue entirely. One thing is certain however. The banking sector will never look the same again.
