UK Edition
The banking sector was thrown into crisis as markets tumbled in early trading on Monday following the emergency takeover of Credit Suisse by rival bank UBS.
The cut-price deal comes less than two weeks after the collapse of Silicon Valley Bank in the US, panicking investors who remember the banking fallout which triggered the 2008 financial crisis.
The turmoil has sent shockwaves across global markets, but today’s banking sector is a far cry from the one which plunged us into recession 15 years ago.
So what does it mean for your mortgage and savings?
Should I be worried about my mortgage?
Despite crisis talks at the banks, there is in fact a silver lining for homeowners who stand to benefit from a slowdown in mortgage bill increases.
Borrowing costs peaked in November 2022 and had steadily fallen in a welcome reprieve for borrowers who had shouldered more than a year of interest rate rises. But at the beginning of this month “swap” rates, a market indicator used by banks and building societies to gauge future borrowing costs, began to climb.
The five-year swap rate has now fallen to 3.49pc, down from 4.12pc on March 8 before the collapse of SVB. The two-year swap rate, which influences two-year fixed rates, has also dropped from 4.65pc to 3.86pc in the same period.
Mr Harris said: “The banking turmoil of the past few days has led to a reduction in swap rates, which have dropped like a stone.
“Those looking to fix in the near future will also welcome these swap rate movements as it means lenders are likely to release lower fixed-rate mortgages as a result.”
The fallout has also thrown another Bank Rate increase by the Bank of England this week into doubt. The central interest rate is currently 4pc after ten consecutive rises and had largely been forecast to increase to 4.25pc on Thursday, before the recent turmoil.
But analysts and economists have warned more “aggressive hiking” from the Bank of England could exacerbate financial instability.
Pantheon Macroeconomics, an economic consultancy, expects Bank Rate to remain at 4pc at this week’s meeting. It said: “Recent developments in financial markets have strengthened the already robust case for the Monetary Policy Committee to stop hiking.”
Mr Harris said a pause in rate rises would spell good news for borrowers on variable mortgages, which go up and down with the Bank Rate, who will be spared another increase in monthly payments.
Markets expect interest rates to peak far sooner and lower than forecast before the turmoil triggered by the collapse of SVB and Credit Suisse takeover. Rates are now forecast to peak at 4.15pc in June – at the beginning of March investors expected a high of 4.7pc in November.
The price war between mortgage lenders has already picked up pace again in response to lower swap rates.
Tomorrow major lender Santander will reduce its fixed rates by up to 0.28 percentage points and launch a five-year deal fixed at 3.99pc – borrowers will need a 40pc deposit and to pay a £999 fee.
Matthew Jackson, of broker Mint Financial Services, said: “It is more and more likely that the Bank of England Bank Rate will be held this month and this will kick off some aggressive pricing from lenders.”
However, falling swap rates is not good news for savers who had only recently begun to reap the rewards of higher interest rates. Sarah Coles, of Hargreaves Lansdown, said the best savings deals could disappear in the coming days.
Ms Coles said: “If we get more uncertainty from the sector and the Bank of England pauses rate rises then the most competitive deals around right now might be the best we see for a while.
“However, if the banking sector settles, the Bank of England may well stick with its rate rise plan, so we could continue to see rates tick up.”
The best easy-access rate is currently 3.4pc with Chip, while the highest interest rate on a regular saver account is 7pc with First Direct.
Is my money safe?
The strict regulations introduced in the wake of the last financial crisis should protect investors’ and savers’ deposits from another fallout of the same scale.
In a statement today Downing Street insisted the UK banking system was “safe and well-capitalised” despite the turmoil, while the Bank of England said it remained “safe and sound”.
A No 10 spokesperson added: “We have a strong regulatory system and we have taken a number of steps over the past 15 years, together with the Bank of England, to strengthen that system.”
The speed of SVB and Credit Suisse’s demise has spooked investors and markets. But banks must now adhere to tighter rules on lending and balance sheets intended to protect their customers from a repeat of the 2008 crisis.
As a consumer, the best step you can take to protect your savings in a worst-case scenario is to ensure they are with a bank protected by the Financial Services Compensation Scheme.
The lifeboat fund covers losses up to £85,000 per banking institution regulated by the Financial Conduct Authority or £170,000 for a joint account, should it go bust. An important caveat is that it will only pay out the maximum amount per institution – that is the parent company which holds the authorisation with the City watchdog, not the individual bank.
So if you have saved more than £85,000 with two banks owned by the same institution, for example Lloyds and Halifax, you will only be covered for the maximum limit. If you have any concerns, it might be wise to spread your savings across a number of banking institutions to keep them under the £85,000 limit.
Is it still safe to invest in banks?
Investors have voted with their feet and responded to SVB’s collapse and the crisis at Credit Suisse by indiscriminately selling bank shares.
Susannah Streeter, of stockbroker Hargreaves Lansdown, said: “Banking stocks have been on a rollercoaster ride, dropping sharply as problems escalated at Credit Suisse and worries about contagion rattled investors.”
Victoria Scholar of Interactive Investor, another broker, said financial firms including Standard Chartered, Barclays, Lloyds and NatWest were trading “at the bottom of the basket” of the FTSE 100 when markets opened on Monday.
Ms Scholar added: “Banks, financial services, and insurance are the worst performing sectors across Europe.”
Jason Hollands of investment firm Bestinvest said Standard Chartered could make gains on the back of China reopening thanks to its strong presence in Asia.
However, investing in the banking sector is now riskier than it seemed just days ago – and savers should be braced for further volatility.