HSBC becomes the first big bank to raise lending rates

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hsbc puts mortgages up despite no change in base rate

The recent, much publicised, chaos in the world wide financial markets is causing banks and building societies to raise their lending rates regardless of Bank of England’s preferred policy; the Bank of England’s interest rate is currently standing at 5 percent.

Much of the recent lending rate rises are directly related to the world wide financial issue. This is not just an issue which concerns banks lending to their customers, but moreover, recently, it is more a case of problems with inter bank lending. With the world wide financial crisis including the collapse of Lehman Brothers, the forth largest bank in the world, Fannie Mae, Freddie Mac, and the insurer AIG all coming into Government hands, banks are becoming increasingly cautious and are unwilling to lend amongst themselves. The problems that the financial system faces now is that the attitude of the banks has led to a significant lack of liquidity in the market; if this problem continues to persist the financial system will be under significant risk of coming to a stand still.

The liquidity problem in the financial system is nothing new; indeed it is one of the reasons why the credit crunch kicked off in the first place. The problem now, is with the lending rate (LIBOR) at which the banks are prepared to lend money to each other. The gap between the overnight lending rate and the 3 month LIBOR rate currently stands at 1.5 percent compared to 0.1 percent a few weeks ago. What this means in real terms is that they are not willing to lend out cash on a long term basis for fear of not getting it back. This is causing huge problems and this risk averse attitude is one which is unlikely to bring and benefit to the world wide financial markets.

The first big banking institution to raise it mortgage rates, HSBC Plc, added 0.3 of a percentage point to the rate of interest required from house buyers requiring a mortgage for 90 percent of the total amount required to purchase their property. This will take their rate from 5.97 percent to 6.27 percent; significantly over the Bank of England’s base rate of 5 percentage points. In the early part of this week, the Yorkshire Building Society increased its rates, now First Direct, the HSBC subsidiary, and The Woolwich, the mortgage arm of Barclays, have quickly followed suit.

As a result of the inflated inter-bank lending rates, the banks and building societies are holding on to their cash; they are waiting for some version of the US Federal Government rescue package to go through. Also, because of the decline in the property market many of the financial institutions will be sitting on huge potential write downs which will significantly affect their balance sheet, and which, conveniently, they have yet to declare. It is hoped that the US Government proposed $700 billion rescue package will bring some much needed stability to the markets; indeed many from the City of London are looking west for the outcome.

Some city analysts believe that the only way for the financial institutions, banks and building societies, and the world wide market to stabilise is for the banks to only lend money out on what they already have held in deposit savings. This goes against the very nature of banks and the capitalist world in general but it may be a prudent move for a market which is unsure of where to turn next.