How safe are UK Banks?

ianmr65

Last night the US fed, and central bank rescused Bear stearns, with the help of JP Morgan.
Over the space of a weekend, it extended emergency credit, and fire sold the striken bank, with £30bn as a guarentee.
The shareholders lost pretty much 99% of there holdings, but bear's counterparty credit positions are stable, thus preventing a crash on the credit derivatives markets, and it's bond holders, and creditors have not lost all there money, and won't, if the take over is approved. Not an ideal result esp in the moral hazzard light. But a desisive move.

Last september the Bank of England, the treasury, and the FSA procrastinated, ditthered, and fudged over much smaller deal, with a much smaller bank. Northern rock - Lloyds TSB were prepared to act as a white knight, but the goverment did not want to provide any gaurentees.

Instead we had a 4 month protracted shambles, which ended up in the bank being nationalised, and the tax payer having to fork out a decidely risky £30bn, and skewed the market as NRK, is now a branch of national savings,

Now HBOS and A&L are looking decidely risky. There share prices are plummetting, in the wake of the bear stearns crisis, they have high exposure to the mortgage market, poor liquidity and depend on credit markets for there funding.

I think that if HBOS results are, as is likely, very bad. Confidence may well be lost in that bank. No matter how many Howard the grinning loon adverts Halifax put out.
If it collapses do we trust the gang of three, to effect a rescue? And what will be the impact on the Uk economy, and confidence in the banking system if a major UK bank does collapse, if that is what happens.
Clearly the first £35k on deposit will be safe, under the FSA scheme, but there is a lot more to HBOS than just a deposit house.
Credit card holders, Mortgage holders, and a vast number of finacial product holders could be serverly and adversly effected.
Any thoughts?

Entertainer

We were looking to you for the answer.

ianmr65

I'll have to mull this afternoon, in the meantime, FT says the the massive drop in the price of banks stocks in the UK are basically down to traders worrying in case one of the UK banks has to be rescued.
Worryingly US banks, even Lehman bros, the most risky one, are not falling anywhere near as fast.

ianmr65

OK, i’ll have a go.

I think the eu situation is different to the US. In that the exposure to sub prime is much lower, and that the economies in the eu/eef, are stronger.
Having said this, a great deal of the Bear exposure was to prime, or alt-a (nearly prime) mortgage derivatives. Now the US housing market is tanking. The situation in the EU is probably lagging by 6 – 12 months. In this scenario, banks in countries like the Spain, and Ireland where the house price correction is sharp, will be affected sooner. Anglo Irish lost 14% of it’s share value today.

The ability of central banks in the euro zone, to affect a crash is reduced, as they don’t control the money supply. The ECB does that. So they will be a great deal more reliant on the ECB to effect a rescue. This means that the banks in the euro zone, are (somewhat) insulated from a crash, on the bear stearn/northern rock scale, by dint of all the countries in the zone having to pull together.

When we come to the UK, our housing market has only just started it’s correction. Notwithstanding this, HBOS and A&L have ended the day significantly down. As their exposure to a falling housing market is extremely high, so the market took fright. If the bear rescue had not happened, it is likely that their stock would have fallen a great deal further. The injection of £5bn, by the BoE also helped,

The ability of the bank of England, on it’s own to rescue a bank of the size of HBOS is doubtful. It would need to persuade a Lloyds, or an HSBC to affect the rescue. With the ECB’s help, if the ecb wanted to help that is.

The commitment to public spending, and rein on public borrowing, and concerns about inflation coupled with a very strong pound, also leave the UK in a weak position to cope.

The Uk is hampered by a strong (in political terms) prime minister, who is a terrible communicator, a control freak, and a procrastinator. Who is additionally desperate to win the next election, at all costs; and who has saddled, and will saddle himself with a weak chancellor and treasury team. Ed Balls – next in line to be chancellor will i think be worse than Alistair darling (if that’s possible)
The UK is also hampered by a three way power share between the BoE, the treasury, and the FSA, which makes quick decision making rather difficult.
However it is to be hoped that they have learned something from the Northern Bear Crisis.

My view is that should a bank look like it is going to fail, here, the chances are that a Bear Stearns like buy out would be a deal more likely, however guarantees, and flexibility, would be sought at much higher levels, than northern rock, and I worry that they would mess it up.

So in conclusion, I think our ability to cope with a UK bank failure is far worse here than, the US or the EEF, or the Euro zone.

free4440273

I am 'watching' A&L and B&B

Browntrout_2

I was really impressed by the decisive action taken by the Federal Reserve Bank.

On Friday morning Bear Stearns was staring into the abyss, by Sunday it was bought out.

J.P. Morgan Chase & Co. is buying battered broker Bear Stearns Cos. for $236 million in a Federal Reserve-backed bailout unprecedented in scope and execution.

The Federal Reserve, which cut the discount rate in a co-ordinated move with its announced backing of the deal Sunday evening, is taking the extraordinary step of providing special financing in connection with this transaction.

"The Fed obviously acted to stopper systemic risk and its actions did keep the Bear portfolio of troubled securities from being dumped on the market," said Robert Brusca, chief economist at Fact and Opinion Economics.

Meanwhile in the UK we had queues of pensioners outside every high street branch of a building society and months before it was taken of market and nationalised!

davsmith

I know all the UK banks have taken a hit today but HBOS share price has dropped 12.8% :eek:

That doesn't look good at all...

Stavros_3

I have decidedly more than 35k tied up in a 1 year fixed bond with the A & L, should I be worried?,

Robson300

good short term gains to be made if you're quick and brave enough!

ianmr65

Stavros wrote: »

I have decidedly more than 35k tied up in a 1 year fixed bond with the A & L, should I be worried?,

I think we should all be worried. What's been going on in the global banking sector today is unprecedented.
Not just if you have money on deposit. As Channel 4 news pointed out mortgage offers are being withdrawn within an hour, as banks are unable to secure financing for them. This is gonna do wonders for housing market , and the economy in the UK:eek: :eek: .

Having said this I think A & L are small enough to be rescued/bought, (they only have a market cap of about £2bn) As are the other ex building societies, and the 'foreign' banks esp thos with lots of assets.
The problems comes if institutions like HBOS, who's market cap is about £20bn, or lehman brothers at £10bn fail.

Leeds_Fella

So how safe do guys this HBOS is? is there a real risk of collapse or is a blip in the stock markets?