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Regulator warns lenders
Andrew Bailey, chief executive of the Prudential Regulation Authority and as such Britain’s most senior financial Regulator has warned mortgage Lenders and building societies that they must not return to the sort of high risk lending that helped cause the 2008 financial crisis and led to the collapse of several societies including Cheshire, Derbyshire and Dunfermline.
In his address to the building societies annual conference in Harrogate on 21st May Mr Bailey said that the regulator is carefully monitoring societies in the light of increasing evidence that they were making large loans compared with the value of property and the client’s income. He stressed that it was imperative that societies did not repeat the mistakes of the previous three decades when they got sucked into high risk lending in an attempt to boost their returns against competition from bigger banks.
“Lenders ventured into higher loan-to-value, subprime and commercial property lending without having adequate risk management”, he said and added “this diversification was generally not successful and in some cases fatal”.
The regulator is also keeping an eye on the growth in loans to landlords although they have found no evidence so far that buy to let is of poorer quality than loans to owner occupiers.
The cost and complexity of IT systems and their vulnerability to cyber-attack are other areas of risk currently being scrutinised by the regulator partly in light of the IT problems encountered by the Co-operative bank following its acquisition of Britannia Building Society in 2009. Also the relative lack of investment available to smaller lenders leaves them vulnerable to maintenance and security issues.
Finally the chief executive set out more details about the new regulations coming into force next year aimed at making the chief executive and relevant senior managers of financial institutions more responsible and accountable for performance. “Clarity of responsibility is, I hope, unobjectionable. But this is not clarity in the sense of facilitating witch hunts” he said.
The new regulations were recommended by the parliamentary commission on banking standards set up to address concerns that bankers such as Fred Goodwin former chief executive of RBS could not be prosecuted for the collapse of their institutions.