Banks targeted after price-fixing allegation

ROYAL Bank of Scotland (RBS) and Barclays have been raided by government officials investigating allegations of price-fixing involving the cost of commercial loans.

The Office of Fair Trading (OFT) confirmed it had launched a probe into "alleged anti-competitive conduct" by the two firms, and said the inquiry had a "narrow focus".

The trading watchdog added: "The OFT's investigation is at an early stage. The OFT will not be in a position to conclude whether the law has in fact been infringed, until it has completed its investigation and assessed the available evidence."

Barclays said it contacted the OFT on 17 March after it became aware that certain members of the professional services team in its commercial banking operation had "been approached from outside Barclays in a manner which we regarded as inappropriate".

These concerns were thought to have been sparked by alleged approaches from RBS to Barclays over sharing information such as the cost of loans to legal and accountancy firms.

Barclays has applied for leniency, meaning it could be spared a fine if the OFT uncovers any wrongdoing. Firms can be fined up to 10 per cent of their turnover under the Competition Act.

A spokesman said: "The OFT started an investigation in which Barclays is participating.

"The investigation is operating within the confines of the professional services banking area and we believe that, if there is any issue, it starts and stops there."

An RBS spokesman said: "As the OFT has stated, they are in the early stages of an investigation. We are, as always, co-operating fully with the regulatory authorities and it would therefore be inappropriate to comment further."

UK banks have also come under OFT scrutiny regarding overdraft fees.

The regulator is challenging the overdraft fees of eight banks, including Barclays and RBS, in a High Court action.

Buy-to-let mortgages trigger a new scare for bankers

WHAT started as a health scare for one man soon led Britain's ailing banking sector into an even graver state of illness.

Steven Crawshaw, the chief executive of the Bradford & Bingley, stood down at the weekend in a company statement which said he was suffering from a serious cardiovascular condition.

Ominously, the statement went on to warn that the building society, which is Britain's largest buy-to-let mortgage lender, would give an update on its financial performance.

When it did so at 8am yesterday, it revealed substandard profits and said it expected more customers to fall into arrears, sending shares in other mortgage lenders tumbling.

Bradford & Bingley revealed pre-tax losses of £8 million in the four months to the end of April. Faced with increasing levels of arrears and a profit down from £108 million last year to £56 million in 2008, the company revealed a scaling back of its rights issue, with shareholders being asked to raise £258 million, some £42 million than had previously been mooted. It was also revealed that B&B had agreed to sell a 23 per cent stake to the Texas Pacific Group (TPG), one of the world's largest buy-out groups, for £179 million.

Rod Kent, who has taken on the role as executive chairman until a replacement for Mr Crawshaw can be found, was presented with an unenviable task on his first day. "The last few weeks have been challenging for B&B, and this is a disappointing trading update, reflecting a more difficult market environment," he said. "I understand shareholders' disappointment."

B&B said arrears levels had risen to 2.16 per cent against 1.63 per cent at the end of December for people three months or more behind with repayments.

The number of borrowers missing repayments is set to rise further amid the housing market slowdown, although it said arrears should increase at a slower pace in the second half of the year.

B&B stressed that its savings and lending businesses "remained sound," adding that it was funded into 2009 despite the wholesale money market crisis.

Within 15 minutes of the Bradford & Bingley's announcement, RBS, soon followed by Halifax Bank of Scotland (HBOS) – both of whom have launched their own rights issues – posted statements of reassurance, stressing that buy-to-let mortgages represented a mere 1 per cent of its UK loan portfolio. It was not enough to prevent a loss of confidence, however.

When trading resumed, shares in B&B fell at one point by as much as 30 per cent , before closing late yesterday afternoon at 24 per cent down. Shares in HBOS fell 10 per cent, while Alliance & Leicester incurred a 5.2 per cent drop. Lloyds TSB and Barclays dropped 1 per cent and 2.5 per cent respectively. RBS also felt a tremor, although its shares fell just 1 per cent.

CMC Markets dealer David Fineberg said more than 33 million B&B shares had changed hands in a "turbulent start" to the trading week – three times the usual amount.

He added: "Repercussions have unsurprisingly been felt across the banking sector."

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: "The news from Bradford & Bingley is not going to improve the jitters in the UK banking sector, particularly as Royal Bank of Scotland and HBOS have their own rights issues to worry about."

A Black Monday for the industry was all but confirmed when, shortly after B&B's drastic trading announcement, it emerged two of Britain's foremost banks had been raided by the Office of Fair Trading (OFT) regarding possible price-fixing.

The OFT revealed it had launched an investigation into alleged anti-competitive practices at RBS and Barclays.

At a time when the UK bank industry was hoping for consolidation, yesterday was a major setback. Respite, experts suggested, is a long way off.

Kevin Mountford, head of savings at the online price comparison service, moneysupermarket.com said: "This is a very concerning time and, of course, people with savings in B&B will be worried. Whilst I think it's very unlikely that a UK bank will disappear, I would still advise people not to have more than £35,000 with any one institution.

"UK banks are prime material for potential takeovers at the moment. Banks have not become bad businesses overnight and there is still a lot of fear about what other skeletons will emerge from the closet.

Alistair Darling, the Chancellor, said B&B's actions in seeking investment from TPG were "part of the process that the Bank of England has been encouraging (financial institutions] to go through so that they can rebuild their positions after all the problems that arose last summer and last autumn and at the beginning of this year."

But Vince Cable, the Liberal Democrat Treasury spokesman, said that B&B's problems showed the serious difficulties faced by the UK economy.

He said: "Buy-to-let mortgages are some of the worst examples of the irresponsible and unsustainable loans that have been offered by banks over recent years. They have already created thousands of empty homes, particularly in northern England, which investors can't afford and where there aren't enough tenants to fill them."

Let's hope there won't be more Black Mondays for Scotland's star performing sector

THE Boomtown Rats immortalised their dislike of Mondays in song. There were probably quite a few bankers who would have joined in the chorus yesterday.

Yesterday's OFT investigation comes on top of its challenge to the overdraft fees charged by the high street banks, including RBS and Barclays. Both banks are trying to rebuild their reputations with savers and investors.

Will yesterday's bad news have knock-on effects for the rest of the Scottish economy? My answer is probably not, but we badly need an injection of confidence to steady nerves in the financial sector.

A continuing trickle of bad news is corrosive to the strength of this sector. It has been Scotland's star economic performer since the beginning of the century and is now worth about £7 billion to the economy.

In broad terms, the Scottish economy continues to perform reasonably well. Engineering is in robust health, thanks partly to the weakness of the pound. The labour market shows no significant weakness, with rates performing better in Scotland than in the UK as a whole. Spending in the public sector will increase slightly in real terms during this financial year. The most recent data on growth, which predates the credit crunch, nevertheless indicated that the economy was growing at 2.2 per cent at the end of 2007.

Against this, the effects of the credit crunch have not yet fully worked their way into the real economy. Much tighter lending will affect those who have over-extended themselves, with immediate effects on retailers. The fact that summer sales have already started is an indication that they are already beginning to feel the pain. In addition, the sudden increase in the price of energy, raw materials and food is affecting all household budgets. Finally, while Scotland is not in as difficult a position as the rest of the UK, downward pressure on house prices due to the sudden withdrawal of easy credit may also dent confidence and weaken consumer demand. I cannot recall a time when there has been more uncertainty about where the Scottish economy is heading. While I think the financial services sector is strong enough to weather this storm, let's hope we don't have another Monday like yesterday.

• Professor David Bell is a professor of economics at Stirling University and co-director of the Scottish Economic Policy Network.