How has banking regulations impacted UK mortgage market?

Course title:
How has banking regulations impacted UK mortgage market?
Some years after the uproar in financial markets started, an all-inclusive reform of regulation in banking has reached Europe (Barth et al. 112). To a majority of observers outside and within the industry, the new regulations are arriving just at the moment when the industry is entangled in another form of crisis. This, therefore, implies that regulation must catch up with emerging challenges. It is, however, unclear that this might be an opportunity to place the industry on a strong regulatory base and restore it to its vital and essential role in the financial system. Businesses in capital markets are in for the most vital treatment in the new rules. As a result, most universal banks in the region are dedicated their investments and time on coping with the consequences of new rules on the businesses. On the other hand, retail banking, has not received much attention (Barth et al. 125). The regulatory effect on retail banking seems moderate.
The mortgage market has enormously changed from the time of the credit crunch. First-time buyers in the United Kingdom now have to create considerable deposits before climbing the ladder of owning property although the prices of property across the region have fallen. The pattern might not be familiar to anyone who acquired homes before the 1990s (Marcelo et al., 69). However, it has set back the prospective borrowers’ expectations who seek for the form of low interest rates of mortgage that preceded and low deposit that to some degree led to the credit crunch. The wider differences are because of the government, measures of the markets, and regulators. This essay, therefore, seeks to explain how the banking regulations impacted on the UK mortgage market.
Background of the study
As mentioned, the mortgage market has extremely changed since the credit crunch. The pattern that exists in the present are different when compared to those of the 1990s (Marcelo et al. 69). In fact, the pattern has set back the anticipation of potential borrowers that seek for low rates of interest on mortgage and the respective deposits. The wider margins are because of the government, measures of the markets, and regulators. This essay, therefore, seeks to explain how the banking regulations impacted on the UK mortgage market. In this case, banks have sought to make themselves stronger, secure economic recovery, and ensure financial stability. The margins should not be confused with those of profits because the increased bank funding price represents increased costs to the industry instead of profits. It is evident that the net interests’ margins of banks, the difference between the rate of interest at which the bank borrows in order to finance a mortgage and rate it charges to the borrower of the mortgage continue to decrease (Jobst 320).
In simple terms, the cost of raising funding by banks from wholesale markets and retail depositors have increased tremendously when compared to the historical standards. In this case, while banks fund through a mix of wholesale deposits and money, the balance has been changing as regulators are encouraging banks to finance a higher proportion of their portfolios of mortgage with long term retail deposits that are offered by savers. Consequently, deposits are a leading portion of the funding mix, meaning that the market rate of wholesale is less of an effect on the mortgages’ costs than the rates paid by banks to its savers. In cases where banks borrow money, they currently use the rates of up to 2 or 3 percent greater than the base rate of the Bank of England, presently standing at 0.5 per cent (Garcia et al. 220). The opposite of the condition before the credit crunch was when the rates of savings were below the base rate. Presently, institutions of banking are competing for funds of savers, and this pushes the funding cost even higher because the banks offer appealing rates. This is beneficial especially to savers, but also makes mortgages more costly for borrowers.
It is evident that some lenders continue to face higher rates of borrowing in a strict wholesale money market. Regulators now necessitate banks of the United Kingdom to have more than twice the capital they held prior to the credit crunch. In this case, banks will be required to further raise their capital in steps until 2019 when the Capital Requirements Directive is completely implemented (Arch 230). There is a cost related to holding the higher amounts of funds (capital) that is being passed on to banks borrowers. The securitization market made it possible for banking institutions in the past to change portions of their mortgage book into appealing financial products for significant investors. Therefore, it offered comparatively less costly funds for new mortgages. The market is yet to go back to its previous levels of activity. The American subprime challenge that was based on that form of repackaging was among the causes of the global credit crunch (Ayadi and Rosa 212).
Although repossessions and defaults of mortgage are kept as low as possible, risk of lending has risen up. Banking institutions are also assisting customers in difficulties related to finances in order to stay in their homes, in some instances by decreasing the monthly payments of mortgage. However, they are also required to hold more funds against mortgages subjects to programmes of forbearance that increases their costs, by the FSA. For a majority of individuals, mortgages offered by banking institutions remain considerably less costly than they were prior to the credit crunch (Garcia et al. 225). The enormous majority on standard variable rates (SVRs) and base rate trackers saw their monthly payments reduced during the years 2008 and 2009.
The Bank of England base rate also known as the Official Bank Rate has played a significant role especially for those who take up mortgage loans in the last decade especially loans on tracker and standard variable rates. Albeit the bank holds that complete impacts of a rate alteration can take more than a year to feed into the economy, the custom of expectation has expanded in recent times in that a reduction in the rate of the official bank trailed by a reduction in the mortgage interest cost (Barth et al. 130). It is clear that no one borrows money for free neither does anyone borrow money at the present base rate of the Bank of England. Borrowing from the bank is usually carried out at the base rate and a margin in relation to how the bank evaluates the risk in assumption. Banking institutions can only borrow from the Bank for comparatively short maturities. Banks that wish to borrow money for longer periods borrow from banks that are in the wholesale market as the regulators are more and more demanding. This brings in the issue of LIBOR.
LIBOR is the globe’s most broadly applied benchmark rate for interest rates that are short term on unsecured cash. Sometimes, it is known as the interest rate at which banks borrow money from each other (Ayadi and Rosa 216). However, this is misleading on some perspectives. This is because hedge funds, investment funds, pension funds and others contribute to money markets, as well. In this case, banks seek primarily to lend to their clients rather than to each other. The owner of LIBOR is the Association British Bankers. It is, however, governed by an independent committee and compiled by Thomson Reuters. Although the rates of LIBOR are affected by alterations in the interest rates of the central banks, the rates are a representation of general conditions at a specified period (Arch 240). This is in contrast with the Official Bank Rate that aims at a rate of inflation two years away. It is not all banks and other financial institutions that borrow funds for the wholesale market can borrow at the levels close to the benchmark of LIBOR. The main banking institutions that contribute to this benchmark are least risky and largest. Minor or smaller institutions may be perceived as having a greater risk and; therefore, the cost of borrowing is significantly higher (Stolper 1270). When banks wish to finance longer periods with an example of the five or two year fixed rate mortgages, they are required to pay out extra premium that is higher than LIBOR in order to be able to access the long period financing.
Banks have at all times financed their lending of mortgage from a mix of customer deposits that are placed by either companies or individuals and wholesale financing. Research shows that when retail deposits are on their own, they cannot finance all of lending of a bank because they either mature at the wrong time, or they are not available in the same quantity. However, regulators are more and more demanding that more lending on a mortgage should be financed by customer deposits that are long term (Reddy 323). Taking an example of a mortgage of 100,000 Euros for ten years given that the average savings deposits were at 5,000 Euros and held at an average for a time of five years, one would require a total of forty of such accounts in order to be capable of providing that one mortgage over its life span. This comes before incorporating the cost of offering the related infrastructure of banking or even the risk of a default from a customer and not making payments for the mortgage. Raising money from savers is more costly than when money is raised from the wholesale market (Reddy 330). Presently, the gap might be about two percent or more. Banks are obliged to provide better deals to public savers that wish to have their deposits for more than only a few months by the competition for the funds of the savers. This results in the increase of the cost that is eventually passed on to the borrowers.
Prior to the credit crunch, banks were capable of generating finances by establishing financial instruments that were sold as securities especially to institutional investors, these included hedge funds and pension funds. There were also bonds, as well as, other securities supported by the constant stream of income obtained from mortgage. The term asset-backed security is used to refer to these (Stolper 1272). When the credit crunch stroke, there was slumping of investment activity. Investors ran away from the asset-backed securities that had much reduced intrinsic or uncertain market value. In addition, the banks’ credit ratings also reduced having a significant impact on the securities’ price where they were present. With this effect the main source of mortgage finances for banks, the securitization market, closed and is only in the process of the reopening.
Research Background
In an economy that is depressed, funds are not easier to come by for customers, as well as, for banks (Mitchener 169). As the absorption of the lessons of the credit crunch is ongoing, banking institutions must reinforce safeguards against downturns in the future, as well as, their effects. They still lend to borrowers who are responsible and accountable. Presently, banks endorse four in every five applications of mortgage, a ratio which has remained constant for the last decade (McIlroy 285). Lenders, however, can no longer provide mortgages at the interest rates that are unsustainable and of the easy –credit period. There will continue being a considerable gap between high street mortgage rates and market or official rates for the foreseeable future. In simple terms, the mortgage rate reflects the increased costs of banks related to obtaining the required or appropriate funds, more than other variables, albeit higher liquidity and regulatory requirements also have a considerable impact.
Organization Background
HSBC was established from a minor idea by a local bank that served global needs. The company opened its business doors in Hong Kong in March 1865 and serves about 58 million customers in over 80 territories and countries. The past 148 years experiences have created the HSBC character, the organization believes in capital strength, building long term relations with customers, and strict cost control (Latter 209). HSBC has constituted to change in all forms including new technologies, economic crises, and revolutions. In this case, it has adapted to survive with the resulting corporate character of the organization enabling it to deal with challenges of the modern world.
The TSB Foundations of Lloyd’s are comprised of four autonomous grant-making trusts that cover Scotland, England and Wales, Channel Islands, and Northern Ireland. Lloyds is a market within which underwriters from independent underwriters of insurance join to sell insurance under the name Lloyd’s (Devine and Jenny 26). It began in the 17th Century with ship owners and merchants who joined together in order to share risks. The company is presently a globe’s leading market in insurance. Its initial name was Lloyds of London that changed in 1997and became Lloyd’s.
Natwest Bank was formed in 1968 with the merging of National Provincial Bank and Westminster Bank. The merger enhanced the strength of the balance sheet establishing chances of streamlining the branch networks and facilitated greater investment in new technology. The legal integration procedure ended in 1969, and trading began in January 1970 (Burke 156). It offers services such as credit cards, Access, computer-related cash dispensers, service tills, telephone banking, touch-screen share dealing. Currently, the Bank is part of the globe’s groups of financial service.
Barclays is British financial services and multinational banking company based in London, U.K. Being a universal bank, it carries operations in investment banking, retail, and wholesale. It also carries out mortgage lending and credit cards, and wealth management and operates in more than 50 countries. It has about 48 million customers. The company is organized within Investment and Corporate Banking. Its origins are traced in a banking business known as goldsmith developed in 1690, in the city of London. In 1736, James Barclay became a partner in the business, and the name Barclays was created in 1896. It has a primary listing in the London Stock Exchange and is a constituent of the FTSE 100 Index (Monteith 15).
Rationale of the study and significance of the study
Bank regulations have impacted significantly on the U.K. mortgage market. This is an area of concern has things are different from how they were in the past. It is, therefore, significant to study the impact that the regulations bring paying key attention to four of the biggest banks in the region. The study may be relevant and useful to investors, banks, and the general public.
Statement of the study
The credit ratings of banks are at the moment stabilizing, and credit should be given to increases in the amount of funds they hold, direct intervention by governments, and greater confidence that losses have been disclosed. The cost of funds in the wholesale markets that are short term has constantly decreased because governments across the world acted in the aim of supporting the system of banking in October, 2008 (Arch 227). New regulatory requirements for lenders, however, are now in a position, requiring them to better equal their lending maturities to their financing maturities. In simple terms, this means that they cannot use short term funds to finance long term lending. Furthermore, long term borrowing remains significantly more costly than the normally quoted three month rate of LIBOR. Undertaking a research on the impacts that regulations pose is essential in the business field.
Research Questions
1. What impacts do bank regulations have on the mortgage market in the U.K?
2. Which bank is the best in terms of effectiveness in providing mortgage in the U.K?
3. What implications do bank regulations have on the retail market in the U.K??
4. What can banks do to improve the mortgage business in the U.K?
Research Objectives
1. To establish the impacts that bank regulations have on the mortgage market in the U.K
2. To determine the most effective bank that provides mortgage in the U.K.
3. To establish the implications that bank regulations have on the retail market in the U.K.
4. To determine what banks can do to improve the mortgage business in the U.K.
Structure of the Dissertation
The dissertation is organized into five major parts. These are introduction, Literature Review, Methodology, Data Analysis, and Conclusion. The introduction comprises of Background of Study, Research Background, Organization Background, Rationale for the study, Statement of the problem, Research Questions, research Objectives, Significance of the study, and the Structure of the Dissertation. The literature review contains a brief introduction and past studies related to the topic. The methodology is comprised of Research Philosophy, Research Design, Research Approach, Research Methods, Research Strategy, Data collection methods, Sampling Method, and Techniques of Data Analysis.

Works Cited
Arch, Gail. “Microfinance And Development: Risk And Return From A Policy Outcome Perspective.” Journal of Banking Regulation 9.3 (2010): 227-245. Print.
Ayadi, Rym, and Rosa M Lastra. “Proposals For Reforming Deposit Guarantee Schemes In Europe.” Journal of Banking Regulation 11.3 (2010): 210-222. Print.
Barth, J. R., T. Li, and W. Lu. “Bank Regulation in The United States.” CESifo Economic Studies 56.1 (2010): 112-140. Print.
Burke, W. Warner, William J. Trahant, and Richard Koonce. Business climate shifts profiles of change makers. Boston: Butterworth Heinemann, 2012. Print.
Devine, T M, and Jenny Wormald. The Oxford Handbook of Modern Scottish History. Oxford: Oxford University Press, 2012. Print.
Garcia, Gillian G H, and María J Nieto. “Banking Crisis Management In The European Union: Multiple Regulators And Resolution Authorities.” Journal of Banking Regulation 6.3 (2009): 206-226. Print.
Jobst, Andreas A. “The Treatment Of Operational Risk Under The New Basel Framework: Critical Issues.” Journal of Banking Regulation 8.4 (2009): 316-352. Print.
Latter, Tony. Hong Kong’s Money: The History, Logic and Operation of the Currency Peg. Hong Kong: Hong Kong University Press, 2009. Print.
Marcelo, Antonio, Adolfo Rodríguez, and Carlos Trucharte. “Stress Tests And Their Contribution To Financial Stability.” Journal of Banking Regulation 9.2 (2008): 65-81. Print.
McIlroy, David Halliday. “Regulating Risk: A Measured Response To The Banking Crisis.” Journal of Banking Regulation 9.4 (2008): 284-292. Print.
Mitchener, Kris James. “Bank Supervision, Regulation, and Instability During the Great Depression.” The Journal of Economic History 65 (2011): 152-185. Cambridge Journals Online. Web. 17 Mar. 2012.
Monteith, Kathleen E. A. Depression to Decolonization: Barclays Bank (dco) in the West Indies, 1926-1962. Kingston: University of the West Indies Press, 2008. Print.
Reddy, Yaga Venugopal. “The Myth Of Too Big To Fail.” Journal of Banking Regulation 11.4 (2010): 319-333. Print.
Stolper, Anno. “Regulation Of Credit Rating Agencies.” Journal of Banking & Finance 33.7 (2009): 1266-1273. Print.