British banks are 'technically insolvent'

cottager

withnell wrote: »

In a sense, every bank is technically insolvent, and always has been.
... This is why runs on banks by half the customers means they go t1tsup!

Exactly. I may not understand a lot of things, but to me 'technically insolvent' is not a surprise, and has ever been so. The more people demand their money back, the more Northern Rocks we'll see... this for their deposits I mean, not a legitimate claim for a payment for another reason.

Oblivion

cottager wrote: »

Exactly. I may not understand a lot of things, but to me 'technically insolvent' is not a surprise, and has ever been so. The more people demand their money back, the more Northern Rocks we'll see... this for their deposits I mean, not a legitimate claim for a payment for another reason.

I hope for that reason we will not see interest rates fall much further, and certainly not to zero because that probably would precipitate a run on the banks by depositors wanting to get their savings out.

Dave.

soulsaver

withnell wrote: »

In a sense, every bank is technically insolvent, and always has been.

Insolvency is not being able to pay your debts when they fall due. The bank invests most of the deposits for the long term (eg in mortgages) and has a small amount of liquid assets. Because of this if everyone tried to withdraw their cash the bank could not pay all the depositors --> Technically insolvent

This is why runs on banks by half the customers means they go t1tsup!

The last bit is not quite accurate: Nearly all the worlds banking systems work the same way: only partially capitalised. They are allowed to do so because if the majority of depositors ask for their money back at the same time, the shortfall in short term funding is met from the central bank(s), the 'lenders of last resort'.

Reaper

john_s wrote: »

I found these on the BBC site, about HBOS last Autumn

Thanks for the links - interesting reading. I particularly liked this statement from HBOS:

The bank had said it was ridiculous for such a profitable business to face the possibility of being declared insolvent.

Oh how times have changed.

EalingSaver

Don't agree with statement that banks are always technically insolvent because of 'partial banking'. That is mixing up different things. Just because all their 'debts' in the form of deposits etc. could in theory be withdrawn in one swoop, doesn't make them technically involvent or indeed actually insolvent in the event it happened. That's an issue of liquidity, no solvency per se.

Banks have been technically insolvent in the past e.g. Latin American debt crisis. A major difference this time around is that accounting rules have changed (plus as the whole thing goes on the sheer scale has got much bigger). In past crisis in many cases the financial authorities have turned a blind eye and allowed banks to trade their way of their technical insolvency. A big difference this time are the changes which require them to treat their assets i.e. loans etc, on the books under 'mark to market' rules. This has made their parlous state much more transparent.

Pssst

Oblivion wrote: »

I hope for that reason we will not see interest rates fall much further, and certainly not to zero because that probably would precipitate a run on the banks by depositors wanting to get their savings out.

Dave.

Yes but how would you get it and where would you put it?
I mean,theres a heck of a difference between getting £500 out and a couple of hundred thousand in £50 and stuffing it somewhere? there are people who would kick your front door in and murder you for much less than that.

soulsaver

EalingSaver wrote: »

Don't agree with statement that banks are always technically insolvent because of 'partial banking'. That is mixing up different things. Just because all their 'debts' in the form of deposits etc. could in theory be withdrawn in one swoop, doesn't make them technically involvent or indeed actually insolvent in the event it happened. That's an issue of liquidity, no solvency per se.

Banks have been technically insolvent in the past e.g. Latin American debt crisis. A major difference this time around is that accounting rules have changed (plus as the whole thing goes on the sheer scale has got much bigger). In past crisis in many cases the financial authorities have turned a blind eye and allowed banks to trade their way of their technical insolvency. A big difference this time are the changes which require them to treat their assets i.e. loans etc, on the books under 'mark to market' rules. This has made their parlous state much more transparent.

Insolvency, by definition, is not being able to pay debts when they fall due.
Hence solvency IS an issue of liquidity.