Pictured above: Terence O'Halloran
East Midlands author and businessman Terence O'Halloran has
criticised the latest Bank of England structures to be imposed on
the banks as too harsh and poorly timed.
"Such measures are an overreaction and poorly timed. Not only
has the stable door been bolted after the horse has gone, they are
now setting fire to the roof," claimed Terence O'Halloran the
controversial Lincoln based chartered financial planner.
He believes problems are building up for those requiring a
mortgage as it is more difficult for the banks to lend because of
their 'poor' solvency margins and recommendations by the
Independent Commission on Banking which has suggested that the
bank's reserves must be increased from their current levels to
10%."
"Few people realise that the banks lend out each £1 that
they have, subject to a reserve, a multiple of times. Under the
Independent Commission barely £900,000 would be available to
the public for every £100,000 held by the bank. Under the
international Basel III proposals, the figure would be nearer
£1.33 million, a massive £430,000 extra in the
marketplace for lending at a time when businesses are strapped for
cash and the construction industry requires a stimulus in the house
purchase market."
In his recently published book 'Hindsight - The Foresight Saga'
Mr O'Halloran maintains that the problem is not the bank's
reserves; the problem stems from how they use those reserves.
"Shackling the banks with draconian solvency measures merely
exacerbates the situation rather than solves it," he said.
"Looking back to 1992, 1993, which was the last period of
extreme distress within the banking system coupled with a collapse
of the property market, we can see a classic example of exactly the
same thing. In the mid late to late nineties, banks and
building societies were constrained to 80% loans and high solvency
margins, yet later in the property cycle (2004 to 2006) solvency
margins seem to have been thrown out of the window, 3.25 times
earnings became 6 or 8 times earnings and Northern Rock was lending
125% loan to value on property at the top of the market."
"It is the 'equity' within the property market that provides a
large portion of the bank's ability to lend.
They treat it as a cash reserve and therefore multiply that and
lend their 'multiple' out. There is a perverse logic at work
that seems to be born of a lack of understanding of their own
internal mechanism," according to Mr O'Halloran.
"Basel III has a more realistic view on life and if it is
adopted outside of the UK with higher constraints here then it is
UK citizens that will suffer unnecessarily and so will the
economy," said Mr O'Halloran.