Banking News

The Eurozone

While the Cyprus meltdown has been dominating eurozone news lately, the overall crisis continues to dominate the global economic landscape.According to data from Eurostat, Eurozone jobless rates and the number of unemployed are the highest Eurostat has recorded in data that reaches back to 1995.  In response, as the number of corporates looking for credit support continues to rise, loan documentation continues to evolve. The fundamentals of jurisdiction, governing law and place, and currency of payment remain key but lenders continue to increasingly look to borrowers located (and which have assets located) outside of the Eurozone or EU as a whole. EU member states perceived to be at risk of redenomination are being given a wide berth and borrowers within the risk areas are also increasingly seeking credit support from similar entities.

With regard to the Cypriot bailout, policymakers have averted the crisis in Cyprus for now, but other tiny economies with big banking sectors have been dragged into the spotlight and it appears to be a matter of time before the next request for an international bailout is made.

BBA makes announcements on LIBOR

Last June, the FSA fined Barclays Bank plc £59.5 million for misconduct relating to its submission of rates that formed part of the London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) setting processes.

In response, on 28 September 2012, HM Treasury published the final report on the review of the London Interbank Offered Rate conducted by Martin Wheatley, the chief executive-designate of the Financial Conduct Authority (FCA).  This review considered what reforms are required to the current framework for setting and governing LIBOR and how it can be strengthened since LIBOR is too widely and deeply embedded as a benchmark in international markets to be abolished.

In light of the review, the British Bankers' Association (BBA) announced on 2 April 2013 that providing information in relation to LIBOR and administering LIBOR became regulated activities.  They further announced that, from 1 July 2013, individual LIBOR submissions from banks will no longer be immediately viewable in order to reduce the potential for submitters to attempt manipulation, and to reduce the potential for submissions to be interpreted as a sign of a submitter's creditworthiness.

The BBA will no longer publish euro LIBOR rates and euro same-day LIBOR rates on UK bank holidays, which brings euro LIBOR into line with all other LIBOR currencies.

Corporate Lending

Bank lending to British businesses fell at the fastest pace in almost two years in February, according to the Bank of England. The Bank's Trends in Lending report showed that lending by major UK banks and building societies fell by £4bn, which was the biggest drop since March 2010, when lending fell by £4.1bn, and brings the total outstanding stock of business lending to £443 billion.

With annual lending to businesses now falling at a rate of about 3%, while the average annual growth rate before the financial crisis took hold was more than 15%, reports indicate that it is unlikely to return to pre-2008 levels for at least another three years.

Smaller and medium-sized business continue to struggle to access funding as lenders have become more risk averse during the crisis. At the same time larger businesses with healthy cash reserves have been unwilling to invest because of the uncertainty created by the eurozone debt crisis and general weak outlook.

Personal Lending

Personal debt was at record high last year with data from the Bank of England showing that UK consumer lending rose by £1.2bn in October, the largest rise in more than 4 years, driven by a £893m increase in overdrafts and loans. Whilst net consumer credit flows are starting to show more positive signs, roughly one sixth of UK debtors only pay the interest charges on their debt, without repaying the principal debt itself and the unregulated debt management industry continues to grow.

Draft Cash Ratio Deposits (Value Bands and Ratios) Order 2013 published

On 28 March 2013, a draft order to change the percentage of eligible liabilities that eligible financial institutions are required to deposit in a non-interest bearing account at the Bank of England (BoE) under the cash ratio deposit (CRD) scheme.

The order changes:

• The CRD rate, which is the percentage of eligible liabilities that are required to be deposited at the Bank of England. The rate changes from 0.11% to 0.18%.
• The CRD threshold, which determines the minimum value of deposits that an institution must hold to be eligible for the scheme. The threshold changes from £500m to £600m.

Banks in the loan market usually recover the cost of complying with the scheme from borrowers through the mandatory costs charge. Any change to the ratio of deposits required to be placed at the BoE, or to the deposit threshold under the scheme, will affect the calculation of mandatory costs on sterling loans contained in a typical loan agreement and charged to the borrower. Due to difficulties in ascertaining regulatory fees, the Loan Market Association has recently confirmed that it will no longer publish a form of mandatory costs schedule for its loan agreements.

For further information, please contact:

John North, Head of Corporate

Angela Stallard, Corporate Partner.

Emma Boulter, Corporate Solicitor.