The deputy governor of the Bank of England said this week that, even without the excesses in investment banking, the West would have suffered a commercial banking crisis brought about as the property boom turned to bust.
Speaking at the Investment Property Forum’s Alastair Ross Goobey Memorial Lecture, Paul Tucker, deputy governor for financial stability at the Bank, referenced Adair Turner’s report into the supervision of Royal Bank of Scotland.
This report pointed out that RBS lost more on straight property lending in the UK, Ireland and the US, than on super-senior tranches of asset-backed securities and collateralised debt obligations.
He said: “For me, this highlights how the ‘casino versus utility’ metaphor can apply to all kinds of banking. A highly levered commercial bank that runs a concentrated portfolio of loans to highly geared property investors, funded short-term from the wholesale money markets, is likely to be pretty high risk.”
He added: “A bank does not need to do anything fancy to be high risk.”
Stephen Hester, Royal Bank of Scotland chief executive, who was also speaking at the event, said the bank will continue to be a very important player in real estate lending despite its past over-exuberance.
The former British Land chief executive said that when the bank has corrected its past over exposure in real estate, “we will still be a very important player”, with 20% of its UK commercial lending earmarked for property.
Tucker also warned that the worst is “still possibly ahead of us rather than behind us”, and banks should take what opportunities they can to build their resources.
Not withstanding the progress that banks have made in terms of capital adequacy, he said that “there is no amount of capital reasonably available to them that will reassure the markets that they could withstand the most extreme tsunami if the euro area was to unravel”.
He added: “However unlikely that scenario, the market regards it as a tangible possibility. An event with low probability but gigantic impact affects bank funding costs. In the event of a tidal wave rather than a tsunami, we might all of us – banks and their stockholders, as well as the authorities – be grateful for a few extra billion making the difference to firms’ survival.”
Tucker also said that “given the financial markets’ inherent inclination to excess, policymakers must be ready, next time, to take away the punchbowl”, in order to ensure that markets such as property do not overheat.
He added that “the Bank’s new financial policy committee is being created to do just that. It won’t always be popular, but it will sometimes be necessary. And I don’t doubt that, sometimes, people will say that we acted too soon or unnecessarily”.
bridget.oconnell@estatesgazette.com
