Why bail out failed banks?

opinions4u

As it stands, the bail out of the banks (B&B, Northern Rock) looks like long term loans from the taxpayer that should be repaid over a long time.

As the assets exceed the liabilities, this money SHOULD be recovered with interest.

£50bn of Bradford and Bingley mortgage debt repayments should be able to repay £19bn plus interest from the state and the FSCS, unless we see some exceptional house price falls. Unlikely, though not impossible.

Confidence in the financial system is the key to our society. Lose it altogether and we don't operate as a law abiding nation.

The government contributed to the crisis by building its spending programme on the back of the mortgage market (stamp duty, corporation tax on the banks, IHT etc) and should take a lot of the blame.

Despite this, they have acted appropriately (although slowly) to address things.

Just hope the markets don't go on to test their stated resolve to do "whatever is necessary" as the consequences are scary!

cheerfulcat

Pssst wrote: »

It might be hard to quantify how much of an asset they are. after all,they are only assets whilst they are being paid. Also,many of them are secured against properties which are steadly decreasing in value.
[...]
surely cash in the bank is a more tangible asset?

It's not a question of opinion, it is accounting fact. Money owed ( depositors' accounts ) is a liability, money lent ( mortgages and loans ) is an asset.

baby_boomer

Pssst wrote: »

surely cash in the bank is a more tangible asset?

No.

It could be withdrawn today and has little long term profit potential, unlike a loan.

Cash is a liability because the banks are liable for the money deposited.

Having said that, banks are much keener to have cash than I can remember.

Reaper

esbo wrote: »

You won't be waving them by they are protected to £35,000.

No, if all the banks collapse your £35,000 would not be protected. The money used to pay it comes from the banks, not the government. So you'd think there would be a nice pot of money somewhere waiting to be paid out. Sadly not. If it is ever needed the banking industry is expected to cough up the compensation. If you let the banking industry go to the wall there won't be anyone left to pay it.

Amusingly the much critisiced "passport exemption" that Icesave went for means that the Icelandic authorities pay the first part of the compensation - and they do have a pot of money ready.

So would the governemnt help savers instead? 'Fraid not. The figures are just too big. Barclays bank by themselves represents 80% of the UK GDP if I remember right.

esbo wrote: »

Most people have no saving, so it's no skin off their noses.

But most people have mortgages. Have you heard of "foreclosure"? Even if you have the person using it probably wasn't using it correctly. While I don't know for sure that it is still being written into contracts it was certainly in mine when I took it out 20 years ago.

Look in the fine print and you will almost certainly see that the bank can demand repayment at any time, regardless of whether you have paid them promptly each month. That is "foreclosure".

So a bank is failing. The governement won't save it so as a last resort it demands repayment back on its mortgages. You go to a competitor asking them to take it over but they are all in trouble too because the industry is in melt down so they won't take it on. The bailifs kick you out and sell it for whatever they can get in auction (very little in a recession).

Now I don't seriously expect that to happen, but if you were in charge of the economy it just might!

Ratatosk

Reaper wrote: »

But most people have mortgages. Have you heard of "foreclosure"?

Look in the fine print and you will almost certainly see that the bank can demand repayment at any time, regardless of whether you have paid them promptly each month....The bailifs kick you out and sell it for whatever they can get in auction (very little in a recession).

Sorry, but this is nonsense. The foreclosure legislation is different in the UK than the US, and whilst such a scenario may have happened in 30s America it can't happen here.

The banks can't just simply foreclose a property by sending the bailiffs knocking just as they can't reposses your house in that manner. Both actions require a court order after lengthy court proceedings and foreclosures are almost never granted in the UK.

What you are suggesting is that either the banks break the law or the goverment suddenly decide that foreclosures are a great idea and encourage the courts to take this action. The first option would not be allowed and the second option is political suicide. If it was a choice between helping a bank recover its debts at the expense of kicking people out of their homes I have a pretty good idea which side the government would be on.

Perhaps it is you that needs to read up on what foreclosures are rather than trying to scare people with tales of cataclysm that can't happen. There's enough fear already without falsely stating that people can be made homeless at the drop of a hat.

Reaper

Ratatosk wrote: »

The banks can't just simply foreclose a property by sending the bailiffs knocking just as they can't reposses your house in that manner. Both actions require a court order after lengthy court proceedings and foreclosures are almost never granted in the UK.

I've done some quick reading as you suggest and I think you are largely right, so I take it back. My info came from when I worked at a building society and that is what we were told. Certainly their T&C at the time said they could demand repayment at any time but in practice I accept they would not succeed without a court order which the courts would be unlikely to grant.

Ratatosk wrote: »

If it was a choice between helping a bank recover its debts at the expense of kicking people out of their homes I have a pretty good idea which side the government would be on.

We are in complete agreement here. This thread was started to suggest the government should sit back and do nothing while the banking industry collapsed. I don't for a moment think they would, I was just taking a hypothetical suggestion to a logical (and extreme) end.

If I caused any concern then I appologise. Persoanlly I think the government should and will intervene wherever necessary to ensure the man on the street does not lose out.

purch

surely cash in the bank is a more tangible asset?

It certainly is...

It's a Tangible Asset belonging to the Depositor

It's a Tangible Liability to the Bank holding the Deposit as they have to pay the depositor interest.

nicko33

UK home repossessions rise by 48%
http://news.bbc.co.uk/1/hi/business/7548877.stm
but
"Normally these do not actually lead to someone losing their home because the courts are very reluctant to sanction eventual eviction.
Instead, borrowers usually come to some sort of arrangement with their lenders."

mrposhman

nicko33 wrote: »

UK home repossessions rise by 48%
http://news.bbc.co.uk/1/hi/business/7548877.stm
but
"Normally these do not actually lead to someone losing their home because the courts are very reluctant to sanction eventual eviction.
Instead, borrowers usually come to some sort of arrangement with their lenders."

Though this may be the case CURRENTLY, I feel that banks may become more reluctant to offer the cash (although by repossessing they are effectively writing their asset values down).

I think the government should take this as an opportunity to offer more opportunities of shared ownership schemes to customers in a bad financial situation.

Interest rates will stay at the levels imposed by mortgage companies though the debt held by the customer will be much less therefore lowering repayments. They could either keep the equity levels as they are or if they increase the government can allow the customer to take out larger loans to pay them off but these MUST be based on affordability.

This would increase the opportunity of banks getting the cash in and not have to chase and should help. Its only a small scheme but will invariably relieve some of the pressure both on customers and the banks themselves in terms of knowledge of where cash flows exists.

mrposhman

Pssst wrote: »

It might be hard to quantify how much of an asset they are. after all,they are only assets whilst they are being paid. Also,many of them are secured against properties which are steadly decreasing in value. If you have a mortgage of 150,000 on a house that was worth 200,000 but is now worth more like 110,000 and falling,would you keep paying it especially if the interest rate keeps going up?

surely cash in the bank is a more tangible asset?

A fair value (in terms of Fair Value accounting) of course would be difficult to quantify. Why would people decide not to pay a loan (legal requirement) for which they will lose their house and most likely find it hard to secure future lending. Houses will increase in price again, thats how price inflation works though I hope its over a longer period of time than the most recent boom that we have seen.

Anyways, back to categories of assets. I would have thought that if a loan was still being paid then a switch between secured and unsecured assets could feasibly be sought. In my opinion writeoffs whould only occur when revaluing assets that are to be sold on (though I'm not sure how they sit in FVA, though I think its a flaw if it encourages writeoffs).

For example, a house value falls from £200k to £150k but the customer continues paying the mortgage, therefore the loan to the bank will still be valued at £200k though the security will not only be £150k hence £50k of unsecured assets.

Obviously this increases the risk profiling within banks as unsecured lending would definately be increasing.