Financial volatility on both sides of the pond is not expected to significantly change the expected downward trajectory of mortgage rates but it could temper lending appetites, say experts.
Earlier this month Silicon Valley Bank in the US collapsed due to a bank run, when a large group of depositors tried to withdraw funds at the same time. This is the largest failure of a US bank since the global financial crisis.
HSBC UK stepped in to buy its UK business for £1, which had a balance sheet of £8.8bn and about 3,500 customers.
In the US following the collapse of SVB, another institution, Signature Bank closed down and then another, First Republic was propped up by other banking institutions, leading to concerns about a banking crisis.
On the other side of the pond, worries were growing around Credit Suisse as it reported a “material weakness” in its financial reports.
Its largest shareholder Saudi National Bank declined to invest more capital if requested, leading to its share price falling by over 30 per cent and forced the Swiss National Bank to intervene with a $54bn (£44bn) loan.
It was then bought by UBS earlier this week for $3.23bn (£2.63bn), which was well below its market value, and caused concern as it was considered “too big to fail”.
Banking scare could be ‘disinflationary force’
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “For now, contagion looks to have been contained thanks to the concerted efforts both sides of the Atlantic. But there is still uncertainty in the sector and there is a concern that more deposits will flow from smaller banks to bigger banks while this continues,” she noted.
Streeter added that there were concerns that the banking scare would be a “disinflationary force” as it would lead to a knock-on effect on lending which could company and consumer spending if loans were “harder to come by”.
“The UK housing market is already reeling from the effects of a spike in mortgage rates and if lenders turn more cautious it could be another gut punch. But this is likely to be more of a background concern for policymakers right now, particularly as action to stem the spread of worry in the banking sector appears to be working,” she noted.
Streeter said that if rates went up again then it would boost banks’ net income margins, which is the amount of money earning interest on loans compared to what it is paying in interest on deposits. She noted that this would help improve bank stability.
“Inter-bank lending rates haven’t moved much, which is a sign that so far lending rates are not tightening in the UK. Libor, the benchmark interest rate at which major global banks lend to one another so far looks stable in the US as well.
“However, this may be biased given that US’s mega banks are believed to have seen large deposit inflows over the last week or so,” she added.
Azad Zangana, Schroders’ senior European economist and strategist, said: “People are on the lookout for contagion risk. But when you look at the stresses in the real economy, there aren’t that many; we don’t have many loan defaults at the moment.
“Although new borrowing has fallen and the housing market has cooled, labour markets are holding up much better than expected.”
Financial volatility will not ‘significantly alter the downward trajectory’ of fixed rates
Sarah Coles, head of personal finance, Hargreaves Lansdown, said that on the mortgage side it was very dependent on what the Bank of England decided to do with interest rates.
“If it is concerned about fragility and confidence in the financial sector, it may decide to pause rate hikes. Talk about the possibility has already brought swap rates right down and means mortgages rates have dropped back very slightly. If it decides to plough ahead with rate rises, we could see this unwind a little,” she added.
Coles said that looking ahead further, if there was a pause in base rate hikes there could be increases on the cards in the coming months.
“It means anyone on a variable rate mortgage may still see the rate rise, and that fixed rate mortgages may not be on a smooth descending path just yet,” she added.
Coles agreed that the “surprise rise in inflation” could put pressure on the Bank of England to raise rates despite any concerns about fragility and confidence in the financial sector”.
“The mortgage market had been busy pricing in a potential pause to fixed rates, after swap rates fell, so if it decides to plough ahead with rate rises after all, we could see a small bump in some rates.
“However, we don’t expect this to significantly alter the downward trajectory of fixed rate mortgages we were expecting through 2023,” she added.
‘Real risk’ high street banks will scale back lending appetite
Danni Hewson, AJ Bell’s head of financial analysis, continued that there is a “real risk” that high street banks will “pare back their appetite for risk turning off the lending taps or at least twisting them to a trickle”.
“That could have a major impact on the number of products available to UK customers from crucial loans for business expansion right down to those first-time buyer mortgages,” he added.
He noted that there was investor concern about the risks of bondholders following the Swiss authorities’ decision to write down additional tier 1 (AT1) bonds completely.
AT1 bonds are a type of debt issued by a bank that can be converted to equity If its capital levels fall below required amount. This will give the bank a capitalisation boost and lower debt if a lender runs into trouble.
“That decision is likely to be challenged in the courts, but it will have ramifications about the level of appetite investors have for banking stocks and global bank bonds,” Hewson noted.
