Credit is out of control in Bermuda and the onus is on Finance Minister Paula Cox to take steps to clamp down on the problem, according to Opposition Senator E.T. (Bob) Richards.

Sen. Richards, an economist and a former general manager and director of financial regulator the Bermuda Monetary Authority (BMA), said aggressive lending by banks was increasing the chances of defaults on loans and mortgages and adding to the inflation of real estate prices.

Sen. Richards was responding to a story in yesterday’s Royal Gazette, which highlighted BMA figures that showed that Bermuda’s banks were lending $219 million more than they held in Bermuda dollar deposits.

The figures, which applied through the quarter ending September 2006, showed that there had been a huge swing from the second quarter of 2005, when deposits outstripped loans by $484 million.

In a statement on Wednesday, the BMA said the trend showed the strength of the local economy, that the banks appeared to be managing the trend effectively and that the Authority was monitoring the situation.

Sen. Richards has repeatedly warned of the dangers of Bermuda’s overheating economy and how it impacts on the average Bermudian. He seized on the fact that that loans were far outstripping deposits as further disturbing evidence of problems ahead.

“There has been a swing of almost $1 billion in the space of two years,” Sen. Richards said. “This is an indication that the banks have cranked up their lending to a frightening extent.

“Credit is a good thing, but you can get too much of a good thing. The acceleration in the price of real estate is related to the amount of money available to buy it. And it is clear that this aggressive lending by the banks is fuelling inflation in the property market.”

Local banks could make more money by lending to locals than they could by holding deposits and the arrival of 100 percent mortgages was an indication of aggressive marketing of loans.

This was also driving up rents, Sen. Richards added, as those who had bought an expensive property as an investment sought to ensure that rent received would cover their loan repayments.

“This is not good for Bermudians,” Sen. Richards said. “Property is already out of reach of the average Bermudian and will get farther out of reach if this trend continues.

“Anyone taking out a 100 percent mortgage is putting themselves in a risky situation. If everything goes right, things will be fine. But the point is, everything has to go right.”

He said Bermuda’s situation was not comparable to the US subprime mortgage market, which has seen thousands of defaults and has weighed down on the national economy.

“Many of those cases involve people who really couldn’t afford the loans they were being given,” he said. “But the quality of loans here is bound to go down when banks are giving 100 percent mortgages.”

Sen. Richards, who was general manager of the BMA until 1993 and who also sat on the board of the regulatory body for around a decade, said Minister Cox should take steps to deal with the situation.

“This is a case of benign neglect by the Minister of Finance,” he said. “Everybody seems to be focused on regulation of international business but we need some regulation of local lending.

“Credit is out of control and this falls under the purview of the Minister of Finance. In just one or two meetings with bankers, she could help to deal with the problem.”

He dismissed the notion this might involve unpopular decisions.

“I don’t believe this is a difficult case to make to the people of Bermuda, that excess credit can get people in trouble,” Sen. Richards said.

He said he was not going to judge the quality of local banks’ loans, but he was more concerned by the wider effects of their increasing lending.

“The BMA was talking only about the prudence of lending and did not address the macroeconomic consequences,” Sen. Richards said.

“With too much credit, bad things can happen. There is too much money chasing too few borrowers.

“Real estate will continue to be bid up and the overheating in the construction sector will continue. But when the tap turns off, that is when it’s going to hit the fan.

“People will get caught in a negative equity trap and those will be the people who are sailing closest to the wind now.”