The European Central Bank’s decision to hike interest rates in the last several months, to tame the surge of inflation, may not mean much to most people. They may not have a full appreciation of how such increases will eventually impact their lives.
However, it is now becoming evident that the rate hikes are not just a technical issue of interest to economists. It is a reality that affects all those who trust their banks with their savings or borrow to buy their homes.
Most people do not expect banks to be providers of social services. But they certainly expect them to be socially responsible. HSBC’s website recently carried new conditions that made mortgage loans less attractive for those wanting to buy their home. The bank then reversed the minimum deposit increase when faced with allegations of being socially insensitive. It has now claimed that the changes made on its website were “inadvertent”.
Prime Minister Robert Abela weighed in on the dissent to HSBC’s move and urged potential borrowers to shop around for better deals offered by other banks.
He appealed to other banks not to follow HSBC’s example. Politicians often like to project themselves as the defenders of the ordinary person who may be feeling intimidated by the clout of the banks.
However, banks, like all other businesses, are driven by the profit motive. Their main objectives are to give a return to their shareholders, prudently manage the money entrusted to them by depositors, and provide the financial services that the economy needs.
Unfortunately, over the last few years, banks have not always achieved all these objectives.
Incidents of mis-selling, imprudent lending and disregard of compliance regulation dented the trust of many in the banking system.
Banks adopt well-defined formulas to determine whether a home loan applicant is a reasonable risk. The loan-to-value criterion is complemented by other measures, including the age of the applicants, the loan term, the collateral offered, the income of the applicants and their total financial commitments, and any regulatory directives. HSBC refers to these “internal lending criteria” on its web pages.
Externally, the significant increase in property prices in the last 10 years is mainly the result of the economic model adopted by the government to promote economic growth at all costs.
The mass importation of foreign labour increased the demand for rental property as many discovered they had become entrepreneurs.
First-time buyers increasingly find a property’s price unaffordable as wage increases are modest at best. The government did well to introduce the first-time buyers’ grant schemes. But they will never sufficiently mitigate the adverse effects on the finances of home buyers.
It must be stressed that ultimately it is the bank management’s responsibility to define their risk appetite, even if the intrusive oversight of banking supervisors ensures that all banks follow prudent lending practices.
Still, regulators must do more to ensure that banks act in a socially responsible way. This is not done by issuing directives that disrupt the dynamics of a free but well-regulated market or trying to micromanage bank business models.
Banks must show that corporate social responsibility is not just a pious intention but a culture that ensures that depositors, borrowers and shareholders are always given a fair deal.
Ultimately, bank clients and shareholders must never be made to underwrite the risk of management failures, as has often happened in the last few years.