“Spain’s mid-cap banks have some of Europe’s lowest core capital ratios (6.12pc) and the highest loan-to-deposit ratios (182pc).

September 27, 2007
http://business.timesonline.co.uk/to...cle2540172.ece

Barratt’s sales walloped by credit crunch
James Rossiter
The credit crunch and the crisis at Northern Rock hit the housing sector yesterday as Barratt Developments, Britain’s largest housebuilder, revealed a slump in sales of 10 per cent over the past two weeks.

Barratt blamed the sharp fall in September sales on a crisis in consumer confidence as potential homebuyers were spooked by the queues outside the country’s fifth-largest mortgage lender.

Mark Clare, Barratt’s chief executive, stopped short of predicting a slump in house prices. But he admitted that it was not clear how quickly the market would return to normal. He warned shareholders to assume that there would be “downward pressure” on the number of properties it sells in the short term.

Barratt is the first of Britain’s housebuilders to go public on a sales fallout from the collapse of Northern Rock. Barratt built about one out of every ten new homes sold last year.

The run on the Northern Rock has made Britain look like a 'banana republic', the boss of the CBI said last night in a ferocious attack on the handling of the credit crisis.

Richard Lambert said the system of banking regulation had 'failed its first big test.'

His comments are certain to be seen as a direct assault on Gordon Brown and Ed Balls, now the Children, Schools and Families Secretary, who set up the present apparatus for dealing with financial crises while at the Treasury soon after Labour took power in 1997.

Mr Lambert told a Confederation of British Industry audience in the North-East - the heartland of Northern Rock - that a run on a bank was what you would expect in a 'banana republic'.

He said that it should have happened in a 'mature and prosperous country like the UK is almost unimaginable'.

His outspoken views reflect those being heard privately from bankers in the City of London on a daily basis.

Mr Lambert is the most senior figure in British business to break ranks and take on the Governyoument and Bank of England over its handling of the fiasco.

His extraordinary attack contrasts with the virtual silence of the Conservatives, who have been fearful of being accused by the Prime Minister of making the credit crunch worse.

There are strong signs that the credit crisis, exacerbated by the run at Northern Rock, is already causing serious problems for British industry.

The Bank of England's quarterly credit survey issued yesterday notes that companies seeking loans are already having to pay a higher rate of interest, larger fees and face greater demands for security.

Unsecured personal borrowing is also becoming more difficult, while housebuilder Barrett fears a collapse in new home sales.

In his speech, Mr Lambert contrasted Britain's bumbling with the approach in the U.S. and Europe.

"Other institutions around the world have been buffeted around in rough weather. Few of them have been holed."

He lambasted Mervyn King, the Governor of the Bank of England, for the excuses he made when he appeared before the Commons Treasury Select Committee last week.

"It's not enough for the Governor to say that the main difficulties in fixing the problem had been created by the complexity of company law," Mr Lambert said.

"You don't wait for the cinema to catch fire before check out whether the fire precautions are going to work."

While he accepted that Northern Rock had to take 'full responsibility for its business model' - under which it relied on the wholesale markets for deposits - this had made it vulnerable to the 'perfect storm which has blown through the world's financial markets since midsummer'.

Mr Lambert's outburst is particularly significant since before taking the CBI job he had worked in the Bank of England as a member of interest rate setting Monetary Policy Committee.

It is highly unusual for a former Bank policymaker to turn on the institutions with which he previously worked.

As Chancellor, Gordon Brown established the so-called 'tripartite' system of banking regulation in the summer of 1997.

The move almost forced the resignation of the then Governor of the Bank of England Eddie George.

Under this system the Financial Services Authority is responsible for ensuring banks are run responsibly, the Bank of England is in charge of financial stability and the Treasury has the power to authorise the use of taxpayers' funds for bail-outs such as the one at Northern Rock.

"For whatever reason, this tripartite system has failed to deliver the goods," Mr Lambert warned.

"Perhaps there are just too many conflicts inherent in the system where three different institutions - with three different priorities - have come together to tackle a fastmoving crisis."

He said the Government now had two choices.

It could underwrite bank savings, 'which would generate heavy-handed regulation', or return to a world where 'free market forces operate'.

At the Bank of England yesterday the leading banks rejected an offer of £10billion in emergency loans for the next three months.

The cost of the loans, at a penalty rate of 6.75 per cent, was seen as too high.

But, just as seriously, the banks have become concerned that if information about their borrowing from the Bank of England were to leak they could suffer damage to their reputations.

This could lead to a repeat of the terrible scenes seen at Northern Rock branches and on the stock market a week ago.