Impact on banks after house price crash

Flying_Scotch_Man

Maybe I am being paranoid but can anyone reassure me that my life savings are not at risk from the impact of a house price crash on my bank. My bank is a well known building society who not too long ago was considering closing branches to save money but since the house price boom all this talk has been forgotten about. If house prices fall is my building society / bank liable to crash BCCI style and take my savings down with it, when borrowers start to default on mortgages? Obviously the bank has given very large sums of money per house buyer to developers supplying the houses. Where does the money come from and more importantly can the banks take my money stored in their savings account to pay creditors?

dunstonh

If house prices fall is my building society / bank liable to crash BCCI style and take my savings down with it, when borrowers start to default on mortgages?

No.

Where does the money come from and more importantly can the banks take my money stored in their savings account to pay creditors?

A lot of the money lent to you is borrowed by the bank. This is why you see early redemption penalties on special deals.

The big banks do more business overseas than in the UK nowadays. You just have to look at the profits they make and see that the UK chunk is a very small part of it.

If house prices fall, that will have no impact directly on the banks at all. If repossessions start, then that can do but you need to remember that it isnt a total loss. They still have a property and many will sufficient equity. Its only going to be the buyers that have overextended themselves on their loan to valuation where there will be problems. The banks would be able to absorb a significant drop and then some.

Jonbvn

I think you under estimate the size of the majority of the big banks and BS's we have in the UK.

Have a look here for some facts about a well known bank/BS.

dunstonh

If you are talking about the small banks and building societies, then there will be a UK bias but the big ones make more overseas.

It still wont change the fact that a couple of years of losses wont have any real long term impact apart from perhaps some becomming take over targets.

Sapphire

I must admit that the thought has crossed my mind, which is why I am gradually moving some money around so that I never have more than around £30,000 with one bank or building society. That way you can be sure you will recoup most of your money if a bank of bs does go under.

With the enormous amount of lending that's been going on - unprecedented, I think - and with many people having stupidly taken on far more debt than they can repay, I do worry that at some point the British economy is going to go into free-fall. (And the lending is only one aspect of the economy that I have bad vibes about . . .)

equitydealer

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Banks rarely fail, and when they do (BCCI, Bearings etc.) it is usually due to fraud.

As mentioned already, banks receive most of their income from other financial activies such as investment banking and corporate services. Did any banks go bust at the last house price crash?

Flying_Scotch_Man

I have to go with Sapphire on this suject and have thought about moving my money, spreading it around different banks but for another reason also. Banks seem to set limits on capital invested in higher AER saving accounts eg HSBC is 6.5 percent AER limited to £50,000. Has anyone a list of big banks who would not be affected by a sudden house price crash? Or are there investment and corporate services to avoid?

PauliPauli

Have savings with Bradford and Bingley .. always seem to hear how they are such a big player in the buy to let market, an area which would suffer more then most I think in a crash?

Anybody have idea how much they are "geared" up in this area in terms if risk?

Pauli

baby_boomer

The average loan to value on B&B properties in December 2006 was 53%.

The should hopefully cover the first couple of years of any crash, although new build buy-to-lets would no doubt bear the brunt of any fall more heavily than other housing. B&B claims that 60% of its buy-to-let mortgages are on established houses with only a small proportion on new-build flats.

Although developing self-certification mortgages, B&B claims to have avoided other high risk areas like first-time buyers or high loan to value mortgages.

More generally, I'm always surprised by the amount of equity the average mortgage holder has. It's only over the last couple of years that loans above 3x income or 2.5x joint income have gone from 1/3 to 2/3 of new loans.

Flying_Scotch_Man

baby_boomer wrote: »

The average loan to value on B&B properties in December 2006 was 53%.

The should hopefully cover the first couple of years of any crash, although new build buy-to-lets would no doubt bear the brunt of any fall more heavily than other housing.

I'm always surprised by the amount of equity the average mortgage holder has. It's only over the last couple of years that loans above 3x income or 2.5x joint income have gone from 1/3 to 2/3 of new loans.

Its the buy to leters remortgaging multiple times for 200k a go that worries me -- in my little town a friend of mine has over twenty houses this way and still buying! if he gets caught in a crash thats a lot of money the banks have lost. He can declare bankrup.

codetown

I think you are overvaluating what is only a potential risk (and banks have risks as any other business).

In general if a crash happens, even assuming the bank portfolio is not diversified enough (and this is a big assumption in itself; generally false), banks have means to counteract on the crash. Just to mention a few: close down branches, layoff people, repossess houses which people can't repay anymore and resell these houses, stop or reduce significantly dividends (or 'reserves' if building society).

I would be ready to bet that any UK bank should be able to recover from few years of downturn, adpting the correct measures to counterbalance risks and losses.