Why UK banks are not going to cause another financial crisis

UK banks are better prepared to withstand a jump in home loan defaults, cooling fears of a repeat of the financial crisis, analysts have told City A.M.

Strict affordability rules implemented after the 2008 banking crash have strengthened lenders’ loan books, meaning they are well insulated from a potential rise in defaults caused by last year’s upward march in mortgage rates.

“While it is tempting to look back to the great financial crisis, the comparisons between now and 2008 might reveal as many differences as there are similarities,” Russ Mould, investment director at AJ Bell, said.

Routine assessments of the sector by the Bank of England (BoE) – known as “stress tests” – and requirements to keep a larger chunk of cash on reserve to cope with a surge in loans being left unpaid or a Northern Rock style bank run have shored up the likes of Barclays, Lloyds and NatWest’s balance sheets.

The average ratio of capital to risky assets has swelled from 4.5 per cent to 14.3 per cent, according to BoE data.

Sophie Lund-Yates, a senior equity analyst at Hargreaves Lansdown, said: “The majority of the UK’s banks are sitting on piles of excess capital.”

That dry powder may prove its worth if mortgagors fail to repay their debts due to rates doubling over the last year – according to Moneyfacts – and higher living costs eroding their budgets.

Outstanding debt is beginning to look a bit shaky, though.

Some 750,000 people are at risk of defaulting on their home loans, according to the City watchdog the Financial Conduct Authority, raising concerns banks’ bottom lines could take a hit over the coming year.

Greater debt fragility may sour investor sentiment toward big banking stocks.

Top British high street lenders will start posting their full year 2022 earnings early next month.

Although they are expected to have bagged a juicy bump from higher interest rates allowing them to charge more for loans, there is a risk investors will ditch their shares if they sound an alarm over higher mortgage defaults.

Experts also do not think negative equity levels – when the value of a borrower’s unpaid debt tops their property price – are headed to the level rates hit during the financial crisis because of rules put in place over the past decade or so.

City A.M. has reached out to major UK banks for comment.