INTERIM MANAGER AND COMPLIANCE LAWYER Barry Baines says responsibility for the credit crunch lies in the hands of the lending institutions
Most people do their best to avoid the burden of excessive consumer or mortgage debt that bring with them the fear of bailiffs, repossessions and the ultimate sanction and stigma of personal bankruptcy.
That was recognised with the introduction of the Enterprise Act 2004 which permits many bankrupts to be discharged after one year and the ability, after the period of bankruptcy has ended, once again to obtain credit of more than £250 and to become a company director. In reality, though, mortgage companies, banks and credit card companies will be slow – some may even say stupid – to consider lending to those who have not demonstrated a period of recovery and financial stability.
It came as a surprise, therefore, to read a Times report (Lax British bankruptcy rules ‘make credit crunch worse’ – 02 May 2008)
It seems that the National Institute of Economic and Social Research thinks the new rules have fostered an environment in which people are happy to take on debt that they cannot repay, thereby inflating the losses of banks and other lenders. It calls for international co-operation to make bankruptcy laws more stringent, especially in the United States, where lenient bankruptcy and mortgage rules permit borrowers to wipe out debts without penalty. It suggests that the current law amplifies the scale of the global credit crisis.
The alternative and better view may be that the lending institutions are the authors of their own misfortune: that they have through profligate and ill-judged lending policies encouraged people to borrow beyond their means without examining sufficiently their ability to honour their commitments or ensuring that they have adequate security if the borrower defaults.
There was a time when a mortgage company would not lend more then 2.5 times a salary, but now people are encouraged to borrow sums which amount to several times their income. Not only has that placed severe pressure on the ability to repay but in itself has fuelled house prices. Furthermore, with all eyes on profit and none on prudence, the banks continue to offer unsecured loans running into thousands. It may be argued that the irresponsibility – which plays a large part in boosting consumer spending, thus inflation - lies primarily with the lending institutions that lend freely and voluntarily assume the accompanying risks.
The remedy is always in the hands of the lender: lend wisely; take adequate security for the loan; ensure at the outset that the borrower has good reason to require an advance and has the ability to repay it; require the borrower to take adequate insurance for the loan in the event of sickness. The lending institutions are big enough and powerful enough to protect themselves; harsh and vindictive bankruptcy policies are unnecessary.
