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Define "High Risk" lending.
HAMISH_MCTAVISH
Posts: 28,592 Forumite
There have been a few of the usual suspects slinging this term around with relation to business and mortgage lending recently.
So if they could define what they mean by this in terms of actual default and recovery rates, I'm sure the rest of us would be greatly enlightened.
Is a default rate of 1 in 100 high risk?
is a default rate of 1 in 50 high risk?
How about 1 in 25? Is that "high risk"?
1 in 10 perhaps?
Or 1 in 5?
Or 1 default for every 1 loan? Would that be "high risk"?
And lets not forget about recovery rates, which for secured lending are very high....
As has been noted, UK mortgage lending, even including all the 2007 excesses, remains an incredibly low risk proposition, with realised losses of circa 0.2%, or roughly one fifteenth of realised profits each year.
So come on then, all those willing to bandy about terms like "high risk" on a daily basis, tell us what you mean, precisely, by "high".
Or is it the case that you really have no idea what you're talking about?
So if they could define what they mean by this in terms of actual default and recovery rates, I'm sure the rest of us would be greatly enlightened.
Is a default rate of 1 in 100 high risk?
is a default rate of 1 in 50 high risk?
How about 1 in 25? Is that "high risk"?
1 in 10 perhaps?
Or 1 in 5?
Or 1 default for every 1 loan? Would that be "high risk"?
And lets not forget about recovery rates, which for secured lending are very high....
As has been noted, UK mortgage lending, even including all the 2007 excesses, remains an incredibly low risk proposition, with realised losses of circa 0.2%, or roughly one fifteenth of realised profits each year.
So come on then, all those willing to bandy about terms like "high risk" on a daily basis, tell us what you mean, precisely, by "high".
Or is it the case that you really have no idea what you're talking about?
“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
0
Comments
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Pretty much any consumer or business lending book will have some losses. I think it's reasonable to say that all business and consumer lending is risky.
As a result, some extra money has to be set aside in reserve by the bank to cover not only their reserves that are required to cover withdrawals from deposits but also losses that result from loans that will inevitably not be repaid.
High risk lending therefore is where not enough 'cash' is kept in reserve to cover losses on the loan book. An example is Northern Rock which was repeatedly told that they weren't holding enough in reserve by the FSA and then became victims of a bank run when the public got wind of it.
There is a second subsection of this risky bank behaviour. Banks doesn't really just hold cash in reserve, in reality they also hold a range of other assets. As a result, losses on the reserve book can also cause an existentialist crisis. This is what most people think of when they think of the credit crunch and an example is BNP Paribas who kicked the whole credit crunch off.
The trouble with all this is that 'high risk' lending can only be defined later. The second problem is easier to resolve as you can simply require banks to hold better quality assets in reserve, although it's worth noting that the losses in Paribas's and others' losses were to supposedly safe AAA rated assets. The first? That relies on good banking, something in short supply in many of the former building societies.0 -
HAMISH_MCTAVISH wrote: »There have been a few of the usual suspects slinging this term around with relation to business and mortgage lending recently.
So if they could define what they mean by this in terms of actual default and recovery rates, I'm sure the rest of us would be greatly enlightened.
Is a default rate of 1 in 100 high risk?
is a default rate of 1 in 50 high risk?
How about 1 in 25? Is that "high risk"?
1 in 10 perhaps?
Or 1 in 5?
Or 1 default for every 1 loan? Would that be "high risk"?
And lets not forget about recovery rates, which for secured lending are very high....
As has been noted, UK mortgage lending, even including all the 2007 excesses, remains an incredibly low risk proposition, with realised losses of circa 0.2%, or roughly one fifteenth of realised profits each year.
So come on then, all those willing to bandy about terms like "high risk" on a daily basis, tell us what you mean, precisely, by "high".
Or is it the case that you really have no idea what you're talking about?
What do you class as high risk as you appear to know the answer as you clearly do know what you are talking about? Let us have the benefit of you vast experience in commercial risk assessment.
Each individual application will have a different risk profile. The risk of doing one of a particular grade may be acceptable but not 10. You may be prepared to do 1000 at £1 but not 2 at £500. Loan numbers and amounts don't take into account the risk tendency of the applicant.
The delinquency figures you quote are based on successful applicants. They do not include everybody that applied or would take a loan if the door were wide open. If the banks risk assessment process were watertight then 100% should be repaid in full with no need for monitoring, control, forbearance and recovery.
A risk you may be willing to take today may not be one you wish to take tomorrow because of events occurring. Risk assessment depends on future factors too. If they are not clear or predictable then your decision will be different.
Institutions don't have to lend if they don't want to. For those that are prepared to the borrower may not want to pay the price, if they have a choice.
Distressed mortgage lending has had a lot of attention, low interest rates and softly softly handling. Had the market not been helped out the position would have been much worse."If you act like an illiterate man, your learning will never stop... Being uneducated, you have no fear of the future.".....
"big business is parasitic, like a mosquito, whereas I prefer the lighter touch, like that of a butterfly. "A butterfly can suck honey from the flower without damaging it," "Arunachalam Muruganantham0 -
grizzly1911 wrote: »The delinquency figures you quote are based on successful applicants. They do not include everybody that applied or would take a loan if the door were wide open. .
They do however include everybody who took out a self-cert, 125% LTV, fast tracked, non income-verified, liar loan, if-you-have-a-heartbeat-you-can-have-a-mortgage, in the noughties.
And amazingly enough, EVEN THOSE customers have been vastly profitable for the banks.
Because UK mortgage lending, even at it's worst, was incredibly LOW RISK.
It wasn't UK mortgage lending the UK banks lost all that money on, it was overseas mortgage lending.
£15 lost on overseas mortgages for every £1 lost on UK mortgages.
If they'd just stuck to UK lending, they wouldn't have needed a bailout at all.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
Any risk can be priced providing it is transparent.
To allow lenders to risk capital however, requires adequate reserves. Something some of the banks are seriously lacking.
Only HSBC and Standard Chartered appear solvent enough at the moment to absorb a second crisis. Should it occur.0 -
Genuine question....but wasn't some of that overseas loss actually made up of UK losses, as it was all repackaged and sold on debt?
It's OK blaming overseas bad debt, but if you have been selling debt overseas as repackaged finance, you are part of the problem....you can't simply hold your hands up and claim the lending you did was fine...as you wouldn't have sold it if that was the case.0 -
Graham_Devon wrote: »Genuine question....but wasn't some of that overseas loss actually made up of UK losses, as it was all repackaged and sold on debt?
No.
..........“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
HAMISH_MCTAVISH wrote: »No.
..........
So we didn't repackage debt?
Seen it written so many times that we did.0 -
Graham_Devon wrote: »So we didn't repackage debt?
Seen it written so many times that we did.
I'm sure we did.
But it's not included in those figures, sourced from Stephanie Flanders article in the BBC, referencing a BOE research paper by Broadbent, unless you can provide a source which claims otherwise.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
HAMISH_MCTAVISH wrote: »I'm sure we did.
But it's not included in those figures, sourced from Stephanie Flanders article in the BBC, referencing a BOE research paper by Broadbent, unless you can provide a source which claims otherwise.
What I'm saying Hamish is that if we repackaged the debt and sold off the "bad stuff" overseas, it's contradictory to then say our lending was fine, but the problem was losses on the overseas stuff.
The UK banks had partly created the overseas problems which led to the losses.
Therefore, UK lending wasn't quite as squeaky clean, low risk as you make out. You are just dumping the bad stuff in another category and claiming it comes under a different umbrella which is nothing to do with UK lending, when quite clearly to even the casual observer, it was.0 -
HAMISH_MCTAVISH wrote: »They do however include everybody who took out a self-cert, 125% LTV, fast tracked, non income-verified, liar loan, if-you-have-a-heartbeat-you-can-have-a-mortgage, in the noughties.
And amazingly enough, EVEN THOSE customers have been vastly profitable for the banks.
Because UK mortgage lending, even at it's worst, was incredibly LOW RISK.
It wasn't UK mortgage lending the UK banks lost all that money on, it was overseas mortgage lending.
£15 lost on overseas mortgages for every £1 lost on UK mortgages.
If they'd just stuck to UK lending, they wouldn't have needed a bailout at all.
Banks don't just do, hopefully fully secured, mortgages.
How many were turned aside at risk assessment. Just because a 100 were garnted pre boom doesn't mean to say 200 weren't turned away first.
Pre 2007 they had the fat to take bigger risks now they don't.
Ever burnt yourself on a kettle?
If they had just stuck to boring mortgages is wonderful in hindsight. There were, no doubt, many risk analysts telling them to effectively do just that but were overridden by greed and short term opportunism.
Nobody understands these derivatives so lets just keep cutting and shuffling the pack and it will be all right"If you act like an illiterate man, your learning will never stop... Being uneducated, you have no fear of the future.".....
"big business is parasitic, like a mosquito, whereas I prefer the lighter touch, like that of a butterfly. "A butterfly can suck honey from the flower without damaging it," "Arunachalam Muruganantham0
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