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Bank of England Warns of Effects of Negative Equity

Fri, 12 Jun 2009

The Bank of England has suggested that negative equity may be to blame for the UK economy's slide into recession. The Bank estimates that negative equity, which reduces borrowing and spending among home owners, as well as undermining the solvency of lenders, affects between 700,000 and 1.1 million households in the UK, occurring when the value of a home falls below the value of a loan used to buy it. The Bank warned, however, that the figures are only estimates and there is no exact measure on the size of the problem.

The Bank is primarily concerned with the effects of these bad home loans on the banking system, fearing that large losses on mortgage loans can damage the capital positions of banks, limiting their willingness and ability to lend. As such, with banks fearful of acquiring bad loans, the bank's Quarterly Bulletin suggested that the declining property market may have prompted caution from banks fearing negative equity. This situation is exacerbated by the fact that the value of the UK's biggest banks' mortgage lending portfolio is five times the value of their shareholders' capital and reserves - their Core Tier 1 capital.
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