How safe are UK Banks?

Macce

I agree Bradford and Bingley or A&L are probably the ones to watch closely they are currently suffering quite badly from the current financial environment.

ianmr65

Leeds_Fella wrote: »

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

Up untill a week ago I would have said that pretty much every bank was safe, and northern rock was just a badly run one off.

Now I'm not so sure. Bear stearns was the fifth largest investment bank in the US. They were well manged, had a good asset base, and lots of liquidity, so they could easily meet their obligations. Early last week a rumour started going round that they could not meet there margin calls - (sort of Intrest payments) and that there asset base was toxic, this snow balled, and so all their investors asked for there money back all at once. Now If they can go down, pretty much anyone can.

The problem is no one knows who'll be next, if anyone. Sure people look at credit spreads, asset base, exposure to property derivatives, credit rating, any number of things, to try to guess:

However the main thing that sends a bank down, is loss of confidence.

Normal companies fail, when they don't make enough return, or run out of cash, can't match the competition, expand too quickly or get foreclosed by their creditors.

Banks fail when people think they can't meet their obligations.

It's like, 'they might go down, so i better get my investment back' That causes a run on the bank, queue outside branches, and demands for investments back.
And as banks don't have the money just sitting around waiting to be withdrawn, they default.

That's why every mainstream press article or report starts with, in the extremely unlikely event that a bank should fail... before going on to speculate about which ones they think are at risk, or whatever.
They don't want to be accused of starting a run on the bank.

All you can do i think, is to spread your savings around, to take advantage of the 35k backstop. And hope that if you have a mortgage or debt, with a bank that fails, the people who take it on (and someone will ALLWAYS take it on) will not change the terms too drastically.

sorry i could not have been of more help. But if i knew for sure, i'd be typing this on my recently aquired private carrabian island, waited on hand and foot by a bevey of dusky maidens.

i

dmeagor

I have all of my business tax savings in an A&L account, does anyone know if that is covered by the normal savings guarantees?

After watching newsnight this evening I've just decided to move to a Northern Rock business savings account (actually it was a better rate anyway.)

I put 50% of my personal savings into gold just after christmas and I'm feeling quite relaxed about that decision now!

TRUSt_NO_1_2

...mmmmm...

how long does it take to get a 'home info pack' together ?

_pale_

Meltdown_2

Thanks, ianmr65, for your thought-provoking posts (as usual) - that last sentence was particularly thought-provoking! :rotfl:

With regard to what you say about a run on a bank - at least as far as depositors wanting to withdraw cash deposits - wouldn't those banks who don't have much in the way of a branch structure (operating purely by post or internet) be therefore in a better position to delay (at the least) such a run? They could introduce severe delays on posting cheques out (or say they haven't received applications for transfers as yet), take their websites down (with "temporary" difficulties) and such like.
(Hold on, that sounds a bit too familiar ...:eek:)
This would make offshore internet-only banks the least open to queues of angry customers outside their doors. Thus Kaupthing and Icesave must be the least likely to suffer such a fate i.e. much safer than British High Street banks.

ianmr65

Meltdown wrote: »

This would make offshore internet-only banks the least open to queues of angry customers outside their doors. Thus Kaupthing and Icesave must be the least likely to suffer such a fate i.e. much safer than British High Street banks.

Thanks for the thanks :beer:

And i think you're right, esp if the bank's t&c says that they reserve the right to temporarily suspend withdrawals, which many banks have at the moment. The larger the 'small deposit' base the better, in this scenario. Icesave/landsbanki ultimatley have about 50% of their deposit base from iceland itself, which is even more re-assuring, as the icelanders are very financially aware, and would do a great deal to prevent a run.

Having said this, the risk to all banks is not so much a run from depositors. As I said in my post above.
After bear stearns, the big risk come's from bond holders. IE large institutaions/ hedge funds that have lent a bank money, wanting it all back all at once. And not being willing to lend any more.

Kaupthing executed a £1.1bn private (outside the credit market, and below CDS rate) deal a week or so ago, which has, they say secured their cash requirments for the year. This is excellent news as it a demonstates that 3 large institutions think they are safe. Though typically the spin doctors, say it smacks of desperation!! . Barclays, Lloyds and a few others did similar private deals, but they are few and far between.

The problem is that all banks depend on the credit market ALL THE TIME for liquidity. The higher the deposit base, the lower the requirment. But nevertheless a dependancy is there.

CDS (credit insuarance) levels for all but a few banks are now over 200. That means that it will effectively cost them 2% over and above libor (intra bank lending) intrest rates to borrow money, in the credit market. This is untenable. Libor is 5.7% add the 2% CDS and they are borrowing at 7.7%. HBOD CDS is about 4% A & L is even higher.

A CDS level of above 6% or 600 basis points, means you effectivly can't issue bonds, or borrow money on the credit market any more. However Just before Bear went down they were borrowing at 7.5% above libor. That means they must have REALLY REALLY needed the money. This is what spooked the market. And fueled the run, by large institutions. Which they obviously could not pay.

So a high CDS, in and off itself is not a probelm. Especially as these are traded, and are not in the control of the bank itself, and as they are normally but not allways taken out by the lendor (to the bank), and a 3rd party.
Also CDS are not being traded at anything like the levels that have previously been, as the market has seized up.

They become a massive problem when a bank (like Bear) is desperate for liquidity to meet it's obligations.

Now banks are understandabley opaque when it comes to reveling the reality of their liquidity positions. There hardly going to announce to the world they are running out of money. So the markets can only really go by the the factors i listed above. CDS, exposure to toxic derivatives, exposure to mortages, depositor base ect ect.

Now this is a bit of a long shot. But it's only just come to me.

If you follow bloomberg, reuters, cnbc, the FT, yahoo finance, and all the other pure business, and finacial sites, and channels:

And you see a lot of articles, stories, on a particular bank. That the ceo is making soothing announcements, that the share price is falling, that they are facing margin calls, that cds is shooting up, ect. This is a good indicator that something is up. Bear were all other the financial media last week.

Most of the stories at the moment concern lehman brothers.

jsmethven

erm...so if one had a fixed rate mortgage with HBOS and they did tank, what are the risks for the mortgage holder?

Rafter

No risks for mortgage holders - you have a 25 year contract remember - although the rate at the end of your scheme could be horrible and you may have much less choice about where to remortgage next time.

I completely disagree that moving your savings to icelandic banks is safer though.

The likes of Kaupthing are having to pay 12% or more to get funds from the financial markets which suggest they are far more likely to go bust.

http://www.moneyweek.com/file/41437/credit-default-swaps-how-to-spot-the-riskiest-banks.html

Regardless of any guarantee - I'd rather have my savings underwritten by a large UK bank than the prospect of waiting for a country with a population the size of wigan or bristol to pay up their share of the guarantee.

The fact that we have collectively 'saved' over £6 billion in icelandic banks rather than saving closer to home is partly why we are in this mess anyway. If UK savers aren't saving with the UK mortgage banks, then those banks have to borrow from elsewhere which is exactly what Northern Rock did and partly what got them into trouble when the overseas banks all asked for their money back overnight. It wasn't the queues outside the branches but the billions borrowed short term from the city that really caused the 'run'.

The HBOS speculation is overblown in my view. It relates to a dodgy table in the telegraph which completely ignores the fact that a lot of HBOS's mortgages have been sold on to outside investors.

I worry that if a big bank does need bailing out, it will hurt sterling but maybe that isn't such a bad thing? It might help our manufacturing, ween us off imports of goods we don't really need, etc etc. Sure it will hurt in the short term, but we can't keep borrowing money from the rest of the world for ever to buy chinese goods and houses at stupid prices.

R.

edwardnoel

Respected financial publication MoneyWeek is strongly warning people to avoid Kaupthing and other Icelandic banks.

See the article here:

http://www.moneyweek.com/file/41437/credit-default-swaps-how-to-spot-the-riskiest-banks.html

Edit: Sorry - beaten to the draw by Rafter!

purch

what are the risks for the mortgage holder?

Your Debt would be sold onto or transferred to another Lender as an Asset

Depending on the terms of your Mortgage, either the Fixed Rate could be ended and a new set of terms put in place, or the current terms would continue.