FSA investigating banks’ stability

Following the recent turmoil in the financial markets, which has spread from the sub-prime sector in the United States, the Financial Services Authority is to launch an investigation to review the stability of mortgage lenders.

This comes in the light of the problems suffered by the Northern Rock bank, which is the UK’s fifth larges mortgage lender. Over the past few days, since learning that Northern Rock had taken a loan from the Bank of England, shares prices in the bank have plummeted and customers have been queuing around the clock to take out billions of pounds in savings.

The FSA now wants other mortgage lender to prove their stability amidst fears that the Northern Rock situation could result in a domino effect. The regulator is focussing on lenders that it sees as being at risk, and wants these lenders to prove that they are solvent and secure. One industry official stated: ‘The banks have been told to open their books. They need to prove they have stress-tested their finances to ensure they are prepared for the risks inherent in these market conditions.’

According to reports amongst the banks and lenders that are receiving attention from the Financial Services Authority at the moment are Paragon, the Alliance and Leicester, and the Bradford and Bingley. All of these lenders have high loans to savings ratios, state reports, which means that they lend out more money than they take in by way of savings deposits from customers.

The FSA wants these and other lenders to prove that they have access to enough funds to continue offering loans and to cover debt repayments. Lenders would be expected by the FSA to seek assistance from the Bank of England, as Northern Rock has done, until other sources of funding are available through commercial means.

Tom Smith
17th October 2007

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