Cheap credit is a thing of past

Feb 28 2008 by Peter McCusker, The Journal

THE era of cheap credit may be over forever, says the head of City regulator the Financial Services Authority.

Hector Sants said he believes the financial markets will never return to the practices prevailing before the global turbulence sparked by last summer’s crisis in the US sub-prime mortgage market.

Mr Sants predicted that banks will back away from the innovative products which allowed them to package and sell on loans cheaply, and will instead return to the old methods of getting to know customers and forging long-term relationships with them.

He said: “I don’t think markets are ever going to return to the way they were. The idea that at some point they will go back to normal, I think, is a misnomer.

“The new normal will be different from the way that markets behaved in the past.”

Mr Sants acknowledged that the FSA’s supervision of Northern Rock ahead of its crisis last year was “not acceptable”.

An internal review due to be completed next month would find that the FSA should have challenged the bank’s management harder to ensure they understood the risks of the financial model they had adopted.

He insisted that the review would not be a whitewash.