Banks ‘risk reputations’ by failing to help borrowers

Mortgage lenders risk reputational damage if they fail to help customers who are struggling under the weight of rising borrowing costs, a leading credit rating agency has warned.

Moody’s said that British banks and building societies faced “social risks” from interest rates at a 15-year high, as the Bank of England struggles to contain inflation.

“We expect banks to work proactively with their customers to refinance maturing loans or, for those with constrained cash flows, to avoid default,” Moody’s said. “Failure to do so would entail reputational risk.”

It adds to pressure on lenders to protect their customers as households struggle with the cost of living.

Nikhil Rathi, chief executive of the Financial Conduct Authority, warned City firms in November that how they navigated this period of economic turmoil “will determine the industry’s reputation for decades ahead”.

Rising interest rates present a double-edged sword for lenders. On the plus side, they are boosting the profitability of banks. Higher rates have allowed commercial lenders to grow their net interest margins, which is the difference between the interest a bank pays to savers and the rates charged on borrowers.

Margins are rising because banks are not fully passing on base rate increases to depositors. Barclays reports profits for 2022 tomorrow, followed by NatWest on Friday and HSBC and Lloyds Banking Group next week.

Yet higher rates also raise the risk that borrowers cannot service their debts, resulting in bad loans at banks.

There are also the reputational dangers. Indeed, banks have already faced criticism from MPs on the Treasury committee for being “ungenerous” in the rates they are paying to savers.