Still feeling the effects of the crunch

Jan 5 2011 Paul Kaiser, partner, corporate finance, unw, Newcastle

THE collapse of Lehman Brothers in September 2008 brought a wave of uncertainty to global financial markets.

The uncertainty, due to the complexity of the deals Lehman’s had written, has taken years to unravel.

Throughout this period the global financial system has been tangled up with banks focused on understanding their exposure to Lehman transactions and the amount of money locked up in those deals.

The intensity of the so-called credit crunch has had dire consequences for businesses and consumers.

Along with establishing losses, banks have been focusing on re-capitalisation of balance sheets. When will that be complete and what level of re-capitalisation do they need?

Under existing rules current levels should be sufficient and most commentators’ views are that it is probably unlikely that there will be further hardening of regulatory requirements to capitalise further.

So what are the constraints?

Firstly, banks have a lot of existing debt that they need to roll-over or refinance.

Secondly, the banks that took part in the Government's Asset Protection Scheme were given lending targets. Both banks in the scheme reached their targets for mortgage lending but not for business lending, according to a report by the NAO (national audit office). This fell short by some £30bn. Both Royal Bank of Scotland and Lloyds Banking Group have to finance their exit from the scheme in the near term.

Banks are making money once again from the sale of non-core assets and from normal banking operations. They are also borrowing again in the wholesale market so they are accessing finance to lend on. So they have the funds to lend?

Simply put, yes, there seems to be finance to lend. However, attitudes to lending have changed. The real lesson learnt from the past is that the banks lent too much money at too low rates to customers who were too high risk.

They are now reluctant to lend on the same terms or at the same level as before the credit crunch.

As to whether we will see a change in lending attitude in 2011, the answer is quite simply 'not back to pre-crisis levels'.

Paul Kaiser, partner, corporate finance, unw, Newcastle