UK banks look to cyber sleuths to unravel £ 75bn mortgage mystery
LONDON (Reuters) – Does canceling a gym membership mean financial disaster?
This is the kind of question UK banks are asking themselves as they try to determine whether borrowers who owe some £ 75bn in home loans will be right for them when a payment holiday, introduced in the first crisis coronavirus, will end.
Lenders are browsing current account transactions, credit card spending and internet research trends for clues to customer finances as part of a larger effort to understand the damage to their wallets from the pandemic .
The unique mix of economic shutdowns, unprecedented government support, and an uncertain path to recovery has upended old risk models, based on historical data, requiring a more dynamic and forward-looking way of analyzing credit risk. Research involves entering anonymized data and is a way to investigate overall risk rather than individual customer habits.
The stakes are high: underestimating the risks and bank executives and shareholders could experience a sharp increase in losses, overestimating them and banks could restrict loans when they are needed most.
Executives at Britain’s biggest banks say calculating the impact on lending, from mortgages to corporate debt, is the biggest risk management challenge they’ve seen since the 2008 crisis.
“This time around, there is economic volatility beyond anything we’ve ever seen, there is unprecedented government support, and trying to model everything with 100% accuracy is impossible,” said Matt Waymark, Director of Finance at NatWest Group. NWG.L.
Some £ 300bn of payment interruptions have been granted on UK mortgages, as part of a series of measures to support households affected by the virus, and around 70-80% of them have resumed their payments, bankers and analysts told Reuters.
That leaves nearly $ 100 billion (£ 77.2 billion) in arrears at a time when banks also face larger defaults on their business loans and falling income due to interest rates. ‘interest close to zero.
This is a small proportion of Britain’s £ 1.5 trillion outstanding mortgages, but a large default on that stock of home loans coupled with an expected increase in defaults on business loans could push bad debts from 1.4% of their books to 4.1%. by 2022, according to analysts at rating agency Moody’s.
This would be higher than the peak recorded after the 2008 crisis, of 3.96% in 2011.
The first real test is expected to take place in the fourth quarter of this year, when government employment support ends along with various business loan programs.
Government backers have so far meant that there has not been much increase in bad debts. The challenge of determining if this will suddenly change is exacerbated by the fact that some clients without financial difficulties have taken payment holidays to pay off more expensive debts such as credit cards, leading to record levels of debt repayments. consumer debt in Great Britain.
“We have seen very little so far in terms of actual flaws, when models would have predicted a blow after the recent economic downturn, so the question is whether government support programs are simply delaying the problem or l ‘really mitigate,’ Waymark says.
The issue is particularly pressing for UK banks because of the speed and scale with which the scheme was put in place in Britain and then adopted.
According to data from S&P Global, 30% of UK mortgage loans repackaged into bonds were subject to a holiday payment program, compared to 5% of French mortgages and 10% of Spanish home loans.
The pressure to understand the risks has caused UK banks to use data and technology in new ways and at a higher level of intensity than before, which could be useful for modeling other unpredictable threats, such as the climate change, according to Rishi Khosla, Managing Director of OakNorth Bank, which markets its portfolio diagnostic technology to other lenders.
It is accelerating a trend already apparent here before the pandemic of big banks leveraging customer data to increase revenue.
To check the health of corporate borrowers, for example, banks have started using algorithms to scan news headlines for negative articles about particular companies and industries so they can anticipate credit downgrades. .
“I think there is a growing awareness that a certain level of foresight is important to complement the standard risk scoring approach,” Khosla said.
Reporting by Lawrence White; Editing by Carmel Crimmins