Eurozone stress will harm UK lending

Fionnuala Earley, UK consumer economist at Royal Bank of Scotland, said the real danger if eurozone worries continue to drag would be the longer term impact on mortgage lending.

She said: “In the short term, the UK has relatively little exposure to the banking systems in the weaker eurozone countries - only about 12% of the total eurozone banking exposures - but there isn’t room for complacency.

“The UK has much higher exposures to French and German banks. If these are infected by uncertainties about solvency resulting from sovereign debt problems in the weaker economies, UK banks will begin to suffer too.”

She warned that growing uncertainty about solvency would make markets even less liquid and funding day-to-day lending would consequently be much harder.

Tony Ward, chief executive of Home Funding, also cautioned that the longer European leaders delayed announcing a comprehensive bailout plan, the greater the danger that UK banks would turn mortgage funding taps off.

He said: “The fear of further economic downturn in both the eurozone as a whole and in the UK in particular means we get the double whammy of banks being more conservative and holding onto capital and at the same time consumers wanting to borrow less – in effect to de-leverage.”

Ward added that he saw no reason for subdued gross mortgage lending in the UK this year to reverse because demand for mortgages was still depressed.

“Lenders have responded since they still have businesses to run and business plan targets to meet, despite the capital and funding issues,” he said.

“I’m sure this is why we will have seen some lenders flexing their pricing down and even relaxing credit criteria in attempt to stimulate consumer demand.

“Up until July when the latest round of eurozone volatility happened, banks were probably feeling that things were improving sufficiently to kick-start their businesses and open the throttle a little on lending and I’m afraid that will have reversed in recent weeks.”

Meanwhile Paul Broadhead, head of mortgage policy at the Building Societies Association, said despite concern about confidence in the wholesale markets which could constrain lenders, mutuals were in a stronger position than the banks.

He said: “The longer the uncertainty in the Eurozone continues, the greater the impact is likely to be on wholesale funding markets.

“This will impact on all lenders to some degree. However, mutual lenders are predominantly funded from retail savings, the sector has a 25% share of new savings so far this year, and as a result the amount of funds available for new lending has grown.”

Earley and Ward’s comments come on the back of a warning from Mervyn King, governor of the Bank of England, yesterday.

He told MPs at a Treasury Select Committee: “I don't think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer.

“Even on July 21 there was a package which they held out as being the solution to it. The underlying problems hadn't changed at all and they won't change.

“The aim of the measures to be introduced over the next few days is to create a year or possibly two years' breathing space. The underlying problems still have to be resolved.”

Eurozone leaders are expected to announce measures to stem the crisis later today.