Ravi Takhar, chairman of Urban Exposure, the residential development finance provider, comments on the changes to rules governing residential development lending by smaller banks. He says: “Higher capital requirements encourage prudence, which must be seen as a positive for the market as a whole. Banks have historically got it wrong in this market as we saw in the global financial crisis.”
I ask Ravi when the rule change was implemented. “We understand that it is more of a classification than a rule change. It applies a standard risk weighting to some of the smaller banks but some of the larger banks with lots of data and history may be able to negotiate different terms with the Prudential Regulation Authority (PRA). The reason the PRA wants the small, or challenger, banks to adhere to this is because government has to guarantee up to £85,000 per person for any banks that accept deposits. That capital needs to be protected and residential development finance is one of the more complex lending processes simply because there are so many moving parts.
“When you look at peer-to-peer (P2P) lending, why can these lenders take Mr & Mrs Smith’s money and lend it all to a developer without putting any capital aside? We are an institutional lender and we have institutional partners that know the risks involved but I think any rules that protect Mr & Mrs Smith’s money should be welcomed. The last thing that we or any other developer wants is an oversupply of irresponsible lending, which helps in the short term but not in the medium/long term.”