‘Education worth more than banking to UK’

September 28, 2007 at 10:32 am

Education is a word made more famous by Tony Blair than any other Prime Minister. It now seems that education is the leading sector in this country in terms of finance. A report from the British Council this week shows that the education sector in the UK is worth more to the export economy than the banking world and the automotive industry.

A huge £28 billion was earned from foreign students coming to the UK to study in higher education in 2003-4. This figure also displayed an approximate £5 billion rise from the previous year. The research, led by Dr Pamela Lenton of Sheffield University, comes in the same week that the Organisation for Economic Co-operation and Development published figures showing that the UK has fallen from third place to tenth in the table for resident population undertaking higher education. It seems our universities might be more populated with overseas students than with Brits.

The UK economy is boosted each year with a massive £2 billion from overseas students’ tuition fees. The report shows that there are currently over 330,000 overseas students studying in the UK. Roughly 51,000 of these are Chinese and represent one in six of our overseas students.

There are some concerns though that the skills learnt by these overseas students, such as computing, sciences and engineering might be taught here but ultimately are of no benefit to the UK. Furthermore, an increasing number of higher education students are not even attending the courses within the UK but are being sent the work overseas on what are known as ‘transnational’ courses.

In 2001-02 the banking world raised a much smaller £19 billion in comparison to education’s £23 billion that year and the automotive industry’s £20 billion. The Chief Executive of the British Council Martin Davidson said in relation to the new figures, “Fundamentally, this report shows the shift of axis of our education system from one that operates predominantly domestically to one that operates on a truly international basis.”

The wind could easily blow in the other direction for education though. A growing number of overseas students are less than happy with the exorbitant tuition fees (on average, the total amount they are having to pay per year is roughly £15,000). Although this is good for the UK economy at present, it might become a problem when the number of UK residents seeking higher education falls and all of the overseas students return to their respective countries after graduating.

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‘The impact of the credit crunch, should we all be worried?’

September 28, 2007 at 10:27 am

A simple glance through a newspaper stand is likely to be greeted with a barrage of confusing financial terms and grandiose numbers. Peppered with jargon such as hedge funds, credit derivatives and sub-prime and complemented by shock titles such as “Stocks lower as jitters continue” (BBC) “Credit Squeeze gives lenders indigestion” (Daily Telegraph) and “Late Sell-Off Hits Wall Street” (FT) the media frenzy can imbue fear in us all.

The Central Banks have to an extent waved a white flag: £106 billion was injected into the markets by the European Central Bank and £30.7 billion by the US Federal Reserve. The willingness of the central banks to intervene, is a two edged sword though. While on the one hand a lifeline, on the other it shows how determined they are that the current crisis does not spread and become a broader problem for the economy.

So with a little background we return to our question: should we all be worried? While criminally unaware, most of us have money invested in the stock markets via our pension funds. The important thing to remember is that these and other market investments are there for the long term. If you take this stance then don’t worry. If investing for the right reasons and you realise that markets are inherently volatile and do have a tendency to fluctuate, you’re still backing a winner.

Of course investment’s returns are never guaranteed and some geographical sectors have and will continue to perform poorly. However, the historical evidence is overwhelmingly positive. An infamous book on this area “The Triumph of the Optimists” (Dimson, Marsh and Staunton) provides an insight into how, over the long term, stock market investment has provided returns far above other less ‘risky’ assets. For example £1 in shares invested in 1900 would now be worth £16,160 in nominal terms. The same amount invested in cash, a paltry £149.

Those who do need to worry are the ones looking for a quick buck. As John Kenneth Galbraith wisely said “We have two types of forecasters. Those that don’t know and those that don’t know they don’t know”. Again evidence is on our side. Fidelity, one of the worlds largest Investment Managers, looked at investing £100,000 in the UK stock market over 15 years and showed how important investment ‘faith’ is. If their hypothetical investor has been unlucky to miss just the 40 best days in the market after 15 years they would have worked out a staggering £337,264 worse off.

Some wonderful hyperbole has been written in recent weeks: Dan Roberts in the Sunday Telegraph commented – ”It’s only when the tide goes out that you get to see who’s been swimming with their trunks off.” To those who want to play games in the market the recent turmoil should be evidence that while the water might appear calm it has dangerous rips. If the big boys have, despite millions spent on technology and the best brains to come out of Harvard, Yale, MIT and Cambridge, not managed to second guess the markets, what chance do we have with Dave’s tip from the pub? Don’t worry if you’re in this for the long term. Do if you’re looking for a quick buck.

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‘Student debt in Scotland now totals over

September 24, 2007 at 10:06 am

The majority of students at university worry about the debt which accompanies the ubiquitous student loan, with many students facing large debts when they finally graduate. A new report has shown that it is particularly students from Scotland who have been affected – indeed, shocking new figures state that more than £1.8bn is owed by students who studied at Scottish universities.

The loans which have been taken out from the Student Loans Company have cumulatively produced this huge debt amongst the 350,000 borrowers from Scotland and other EU countries; the report shows that each student from Scotland now has an average debt of £5,300 by the time they graduate.

Education secretary Fiona Hyslop believes the disturbing findings should force governments to consider moves to lower student debt. She says: “£1.8bn of state-sponsored debt is not good for the individuals concerned and not good from a public finance point of view.” Although the amount loaned to these students in the past year is £197.6m, only £51.5m of student loan payments were returned in the same year, which shows that student debt in Scotland is increasing heavily.

The reason for this is believed to be much to do with the Scottish graduate endowment fee of over £2000. This replaced upfront tuition fees for students in Scotland in 2000, and must be paid by most students when they graduate. All the money from the graduate endowment goes into a central pot from which the funds are used to fund the bursaries for poorer students.

Many believe that the endowment has been somewhat of a disaster as in the few years it has been in operation, two-thirds of students didn’t pay the fee directly but simply added it to their student loan. Not only is the endowment an extra burden constituting something akin to a “back-end” tuition fee, but it has not even been used for the students’ own learning.

Ms Hyslop has subsequently announced plans to abolish graduate endowment which is a heavy burden on graduate students. This should hopefully happen by April 2008, and it is believed that around 50,000 students will immediately start benefiting. This will help lower student debt across all of Scotland which has, as has been shown,become a serious issue.

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‘News for Northen Rock Customers’

September 21, 2007 at 3:03 am

Queues have been forming outside branches of Northern Rock over the past few days as anxious investors lined up to withdraw funds held on deposit and close their accounts. Attempts to reassure the public from Northern Rock’s CEO Adam Applegarth and Chancellor Alistair Darling have evidently fallen on deaf ears.

A statement from Applegarth on Northern Rock’s homepage reads,

“…Your savings are secure and there is no need for you to withdraw your money based on our recent announcement, and the widespread media coverage that has ensued. The Bank of England has agreed to provide a funding facility to enable us to manage through the current global liquidity crisis. They would not have done so, if we were not a solvent, adequately capitalised, well run bank. I hope this helps to reassure you…”

On Monday morning, there were around 100 people queuing outside the Briggate branch of Northern Rock in Leeds. Several commented as to why they were so concerned:

Sophie M, 62, had been waiting for 40 minutes and said,

”This is my life savings. I can’t afford to take risks with it. I know the government has said the money’s safe but I’ll sleep easier at night if I have it somewhere else.”

Fred S, 75, said,

“I’ve got £75,000 pounds in this bank. I’ve already withdrawn £30,000 on Saturday, but after speaking to my son, who used to work for a bank, I’ve decided to withdraw the rest. Northern Rock has always treated me well, they’re a good bank. But I can’t risk my children’s inheritance.”

Since last Thursday, when the bank, Britain’s fifth largest mortgage lender and a FTSE 100 company, issued a statement revealing it had agreed access to an emergency fund with the Bank of England, about £2 billion has been withdrawn from Northern Rock accounts. This represents about 8% of the bank’s deposit base. This is an estimate from sources close to the bank, as Northern Rock has so far refused to publish definitively how much has been withdrawn.

In reality, it is almost certain that Northern Rock will not go insolvent. The Bank of England has committed to supporting the company throughout the crisis in the credit markets, and it now seems increasingly likely that a bidder will make a move for the struggling bank, whose share price dropped further in Monday’s trading. At around £2.80, the market is currently valuing the bank at around a quarter of its capitalisation of 6 months ago. The bank has an attractive asset in its strong mortgage book, and there are currently several potential bidders circling the bank.

If you are a Northern Rock customer and consider that your savings are at risk, you face a queue of at least an hour at most branches currently. However, please be aware that if you have a ‘flexisaver’ account, you will not be able to withdraw your funds in a branch – you must log on to Northern Rock’s website. A couple trying to withdraw £1 million from their ‘flexisaver’ in Cheltenham had to be removed by police after they refused to leave the branch without their cash.

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‘Bank of England bails out Northern Rock’

September 17, 2007 at 2:03 pm

Northern Rock, the FTSE 100 company and the UK’s fifth biggest mortgage lender, has warned that its profits are likely to be at least £100 million lower than originally forecast. Its shares were trading at around 440p, heading to levels which would put its market valuation at a third of what it was six months ago. The bank would have been dangerously close to insolvency had the Bank of England not agreed to loan them £5 billion to cover their liabilities.

Chief Executive of Northern Rock, Adam Applegarth said,
“We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise. Against that background it is inevitable, albeit disappointing, that our profits will be affected.”

So what, exactly, are the ‘extreme conditions in global liquidity’ Applegarth is talking about? It all comes down to sub-prime mortgage lending in the US. For several years financial institutions have been happy to lend to people with bad credit ratings, or even ‘ninja’ status (no income, job or assets), because they could secure their loan against property. When the property market in the US went into freefall, it became clear that many lenders would not be able to recover the whole value of their loans. This led to HSBC, who had underestimated its exposure to this sort of mortgage, issuing its first ever profit warning in February.

Northern Rock has more exposure than any other major UK bank to the sub-prime sector. They are therefore finding it very hard to fund their mortgage lending. Ideally, Northern Rock would fund its loans by issuing bonds, with the sub-prime mortgage as collateral. However, considering what has happened in the US sub-prime market, there are no buyers for bonds which are secured to sub-prime mortgages.

75% of Northern Rock’s funding comes from the money markets, ie. borrowing from other banks. However, because of the unwillingness of banks to lend to anybody (even other banks) this has become very expensive. 3 month inter-bank rates are currently at 6.75%, a whole basis point above the Bank of England base rate.

It has become evident that with the credit markets as they are, Northern Rock cannot profitably operate its business model. Currently, it cannot make any new mortgages as it can’t fund them. The £5 billion loan made available by the Bank of England is to cover its current liabilities. The loan was approved by the Treasury, who said in a statement: “The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to provide a liquidity support facility reflects the difficulties it has had in accessing longer-term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.”

This statement belies the more fundamental problem that unless current conditions in the credit markets change, Northern Rock will not be able to operate its business model successfully. Although the queues of anxious customers waiting to withdraw their savings might be overreacting given the Bank of England’s commitment, it is unclear at the moment exactly how Northern Rock is going survive if conditions in the credit markets stay as they are for much longer.

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‘Barclays in trouble? What can you do?’

September 14, 2007 at 9:09 am

Should customers be worried about Barclays borrowing so much money from Bank of England?

Recent news that Barclays Bank has had to borrow £1.6bn from the Bank of England has been disconcerting to many Barclays customers. The move, which occurred on 29th August and has been explained as being the result of “a technical breakdown”, has led many to speculate about whether Barclays is going bust. If this is indeed true, then the issue could be serious. After all, Barclays has 11 million customers in the UK and holds over £84 billion of their money. Professional investors in particular are very worried about this as they have invested heavily in Barclays and have much at stake.

This is the second time in one month that Barclays has had to tap into emergency funds. They explain that they were forced to tap into the Bank of England’s emergency credit line because of a small technical glitch and it is nothing to worry about. A statement from Barclays reads: “Had there not been a technical breakdown, this situation would not have occurred. In these challenging times the dramatisation of such situations is of no help to markets, their members or their customers.”

Thankfully, most experts agree that there is very little to be concerned about. It is above all important to note, they say, that Barclays is a hugely successful and profitable bank. For example, last year, Barclays’ profits were a record £7.14bn with the bank making over £4bn on top of that in the first six months of this year alone.

No one can deny, however, that Barclays has suffered losses in several departments. Due to the recent liquidity crisis in the financial markets, the bank has experienced losses in its Barclays Capital department which is involved in the process of buying and selling loans known as CDOs. These CDOs (Collateralized Debt Obligations) serve as important vehicles for investment. No one knows quite how much of a loss this is but it is unlikely that senior management is hiding a huge figure.

What to do if a bank goes bust

If, in the unlikely event of any bank going bust, it is useful for customers to know what this means for them and what they must do.

Customers can make claims for loss of funds and will normally recover most of their investment through the Financial Services Compensation Scheme, an independent body, funded by levies imposed on the rest of the financial services industry.

Any customers with money on deposit can claim up to £31,700 each. This is comprised of 100% of the first £2000 and 90% of the next £33,000.

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‘America has sneezed is the UK also going to catch a cold?’

September 12, 2007 at 10:41 am

Credit Action recently reported that UK debt has now reached a staggering £1,345 bn, with secured lending on homes at £1,131bn. In the US mortgage defaults have supposedly reached critical levels, causing anxiety and uncertainty in the stock market and profit warnings and bankruptcies at some of the largest US mortgage lenders. Looking at the similarities, is a US style meltdown likely in the UK?


In an analysis by the financial commentator Bloomberg, average returns in the UK Property market since 1998 have actually exceeded those in the US. Mortgage defaults have more than doubled and credit is undoubtedly available to those looking to buy. For example Praxis Mortgages boasts of being able to offer 7 x your Income as a loan and a 90% loan to value on re-mortgages for clients in arrears. With the UK mindset bent on home ownership it is unlikely that demand will abate.

So what has caused the Problem?

The world economy has been booming, spurred on by increased demand from the world’s major emerging markets such as Brazil, Russia, India and China. Coupled by an increasing feeling of affluence, global inflation is rising with the removal of cross border barriers further reducing costs. Central banks work to one fundamental principle – inflation is bad and they have increased interest rates to resolve this. Rising rates have increased costs to the average mortgagee causing the bubble to finally burst in the US. As property prices subsequently fall the problem is exacerbated as there is no equity with which borrowers can re-finance their homes.

Will it happen in the UK?

Credit rating agency Standard and Poor’s recently warned that “signs of stress” were emerging in the UK’s sub-prime market. This warning has been too late for some and as reported by the BBC the EU has demanded an investigation be made into whether the warning came too late.

Recent fears have caused the LIBOR, which is where mortgage lenders source funds, to increase above the Bank of England rate. Subsequently mortgages become unprofitable for lenders, with Northern Rock’s share price tumbling horrifically as fears emerge over its ability to meet loan demand. The other major way of lenders finding money is through securitization, – the process of borrowing from investment houses. However, the recent fallout in the US has made many previous investors lose confidence.

So is a bout of financial flu round the corner? Thankfully for UK home owners, recent stock market volatility has led the Bank of England to buck the trend of the past year holding interest rates steady at 5.75%. Lenders have learnt a temporary lesson with specialist sub-prime lenders such as Kensington and West Bromwich withdrawing products. However, the long term forecast is not benign and still clouded with uncertainty. The solution needs to be twofold: lenders must act more responsibly and we as buyers must defuse an overvalued housing market slowly by reigning in our over zealous spending behaviours.

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‘HSBC U-turn Under Student Facebook Pressure’

September 10, 2007 at 4:21 am

Relief was felt by thousands of students and graduates last week as HSBC dramatically U-turned on its graduate charges policy. Humiliated and, presumably, concerned with student confidence in its brand, HSBC was forced to retract its policy in response to student pressure mobilised through the social networking website Facebook.

The bank has also promised to refund students who had already been charged for being in the red during the month of August. Interest free overdrafts for new graduates were scrapped by HSBC in July this year, with interest charged at 9.9%, a rate that would have hit many students hard. Having an overdraft at its limit of £1500 would have accumulated yearly repayments of £148, perpetuating the post-university debt problem for many students.

Several weeks ago, students, graduates and The National Union of Students mounted an online campaign entitled “Stop the Great HSBC Graduate Rip-off”, utilising Facebook to communicate and mobilise the action. The campaign was initiated in response to the imposition of overdraft fees on all graduate accounts and objected to the financial demands placed on recent graduates by the bank. Membership levels in the “Anti-HSBC” groups exploded in a few days following the publication of the story in Guardian Money. At present the group has around 6,500 members.

HSBC were all of a sudden confronted by a widespread and mobilised body of students and graduates, willing to take more direct action against the bank. An official, NUS-led protest march was planned for 4th September outside HSBC headquarters in Canary Wharf. Rumours were that students had a much more direct action planned for the same day. Students were to descend on HSBC branches in force all at the same moment and bring them to a halt by forming long queues and requesting advice about moving overdrafts elsewhere. HSBC backtracked on its policy when confronted with a continued campaign of protest and awareness raising among the student population.

NUS maintains that the manner in which the charges were implemented was too sudden and drastic. Many students complained that HSBC began to charge their accounts without having sent notification. HSBC was exposed for its disregard for the amount of debt dealt with by graduates these days.

Many high street banks choose to reduce post-university interest-free overdraft limits in small steps, a gradual “climb-down” that is more manageable for recent graduates. Graduates this year who banked with HSBC were faced with a complete abolishment of the £1500 interest-free overdraft they enjoyed during their university years.

How does HSBC now recover confidence, not only amongst students but also amongst the wider population? Although a victory has been won by students, it is difficult to find positive feeling towards the bank. New discussion topics on the “Stop the Great HSBC Rip-off” board include, “Which bank should I switch to? and perhaps more worryingly for HSBC’s marketing department “I’m a fresher to be in 4 weeks. What bank should I choose for my student account?” Numerous students and graduates talk of moving accounts and starting afresh elsewhere with providers who do not charge interest on overdrafts, at least for the first year after graduation.

NUS and HSBC will continue talks regarding future policy towards student overdrafts and it remains to be seen what course of action the bank will take. It is difficult to imagine, however, that in the near future HSBC will be a popular option among the new student intake.

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‘Watchdog has succeeded in breaking stranglehold of ‘the big four”

September 5, 2007 at 10:14 am

The UK’s Competition Commission has decided to lift pricing controls on the banking sector that have been in place since 2003. The controls were designed to limit the dominance of four of the UK’s largest banks on the market for small business bank accounts.

After a study in 2002, the Office of Fair Trading discovered that between them, Barclays, Lloyds TSB, HSBC and Royal Bank of Scotland controlled 92% of small and medium-sized bank accounts. This fostered an uncompetitive environment – customers were reluctant to move their accounts because of charges levied by the existing bank and lengthy bureaucratic procedures.

Deputy Chairman of the Competition Commission, Christoper Clarke, stated:

“Having reviewed the evidence and advice from the OFT, we believe that these price controls are no longer appropriate. They were intended to be temporary and have now been in place for over four years… banks providing SME (small / medium sized enterprise) banking services will have to continue to comply with the undertakings on the ease of switching, transparency of prices and the prohibition on bundling of different products and services. The OFT will continue to monitor their compliance.”

These price controls, the commission argues, have paved the way for entry into the market place from banks such HBOS, Alliance and Leicester, and Abbey, who have managed to swipe 7% of the market share – leaving Barclays, Lloyds TSB, HSBC and RBS with 85%. The OFT and CC have been criticised by consumer groups and the competing banks, saying the price controls have been unhelpful. HBOS, for example, offered interest on current accounts and free transfers before the controls were introduced. A spokesman for HBOS said that only 1 in 10 small businesses moved their account in the last 4 years, with excessive red tape acting as the main disincentive.

“Price controls have clearly done little to encourage small businesses to switch banks, and the hassle factor of switching has still to be addressed,” he said.

The Federation of Small Business also criticised the decision, saying that in reality, nothing had really been achieved. The major four banks have not been complying with the spirit of the controls, preferring to pay lip service, whilst making it as difficult as possible for small business to change their banking facilities. Mike Cherry, spokesman on Financial Affairs at the Federation of Small Business, said,

“We are utterly bewildered by the Competition Commission’s provisional decision. We have provided concrete evidence that the big four banks are not complying with the undertakings … and the Competition Commission appears to have completely ignored it.”

The Competition Commission is an independent body (ie, not a government agency). However, it does work in very close proximity to the Office of Fair Trading, which is governed by the Secretary of State for Trade and Industry. Decisions such as the one discussed here are the result of consultation between the two bodies.

The CC’s statement concerning this decision (which is currently provisional) is available here. You can access the 2002 report which triggered the controls here.

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