Business

Mostly Cloudy with Showers 9° London Hi 9°C / Lo 7°C

British banks are 'technically insolvent'

By Ben Russell and David Prosser

Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was "not unusual at this stage in the economic cycle".

However, it will add to pressure on the Government to provide more support for the country's banks. Treasury officials are now set to spend this weekend in talks about a fresh round of measures, which could be unveiled as early as next week, to free up lending to households and major corporations hit by the credit crunch.

The value of Barclays fell by a quarter in stock market trading yesterday, amid a series of wild rumours about its finances, although the bank said it saw no need to comment on the drop. Its board said in a statement last night that it knew "no justification for the fall".

The statement said next month the bank expected to report that profits before tax for 2008 were "well ahead" of the £5.3 billion forecast by analysts.

City analysts said the bank had been targeted by traders after regulators lifted a ban yesterday on the short selling of financial stocks. Barclays' share price, along with the value of other British banks, was also hit by dismal news from the international markets, including the announcement on Thursday night that the Irish government was nationalising the Anglo Irish Bank. In the US, Bank of America announced yesterday that it was taking a $20bn injection of emergency funding from the US government, subsequently revealing that Merrill Lynch, the investment bank it rescued last year, had lost more than £15bn in the final three months of last year.

Citigroup, once the world's largest bank, announced more than $8bn of losses for the final quarter of last year, and revealed plans to split itself in two.

Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the wholesale markets that underpin mortgage and other loans.

Other possible measures being considered include state support to help Britain's largest companies raise their own funds. Another option is to launch a "bad bank" to remove tainted assets from the banks' balance sheets, though while this policy is under consideration, it is thought to remain some way off.

Other proposals include ring-fencing the toxic assets within bank balance sheets. Lord Mandelson, the Business Secretary, has also talked of easing the terms of the Government's £37bn bank bailout in order to kickstart lending. Downing Street made it clear yesterday that the Government remained committed to doing "whatever is necessary to help British businesses and families get through this global financial recession".

Post a Comment

View all comments that have been posted about this article.

Offensive or abusive comments will be removed and your IP logged and may be used to prevent further submission. In submitting a comment to the site, you agree to be bound by the Independent Minds Terms of Service.

Comments

Nationalising Irish Banks
[info]gainsgrove wrote:
Saturday, 17 January 2009 at 12:45 am (UTC)
Your article about the insolvent banks contains a serious inaccuracy. You say the Irish government has nationalised "Allied Irish Banks" That is untrue. The Irish government has nationalised Anglo Irish Bank, an entirely different institution. If this is your standard of accuracy how many other errors are you reporting?
Not much different from a Ponzi, just made respectable by the wealthy
[info]bigbuzzard wrote:
Saturday, 17 January 2009 at 01:30 am (UTC)
The fractional reserve banking system in use by our banks makes this state of affairs 'normal' - it's how the whole thing is designed. To understand it, watch the excellent film 'Money as Debt' - http://video.google.com/videoplay?docid=-9050474362583451279

The whole thing can only work with constant 'consumption' by the public. That's fine if the world's natural resources are essentially infinite, as was the case back in the 17th century when modern banking started. We now know that isn't true any more. But we're still behaving as if it is, like lemmings rushing towards a cliff.

The only person i hear talking any sense about this right now is the Democrat Congressman Denis Kucinich, who's been calling for the Federal Reserve to be nationalised (it's currently a private institution).
Re: Not much different from a Ponzi, just made respectable by the wealthy
[info]drofle wrote:
Saturday, 17 January 2009 at 07:44 am (UTC)
bigbuzzard is absolutely right. If people really understood how money is created, there would be a public uprising against our inherently unstable money system, which requires continual growth if it is not to collapse, and seems to have inbuilt positive feedback. This either results in the meltdown we are seeing today, or the opposite: the hyper-expansion of lending which was the cause of the meltdown.

I have also been recommending the 'Money as Debt' video to people - It's quite long, but definitely worth the time. Here is the link again:

http://video.google.com/videoplay?docid=-9050474362583451279

Surely it is not beyond the ability of our governments and economists to create a more stable system that serves the people better, and is not in the hands of private companies.
Silly error
[info]psiloiordinary wrote:
Saturday, 17 January 2009 at 04:17 am (UTC)
The Irish gov nationalised Anglo Irish. Not Allied Irish as you state above.

School boy error.

Please correct
Banks - technically insolvent
[info]deano30 wrote:
Saturday, 17 January 2009 at 04:36 am (UTC)
With Peter (would be Lord) Mandelson the intellectually and morally insolvent, nay, bankrupt politician of his generation involved - who gives a fig!
[info]mykleboon wrote:
Saturday, 17 January 2009 at 07:48 am (UTC)
The key to technical insolvency lies in the mark to market rules. When the market has, to all intents and purposes, ceased to exist, then marking to market is impossible. Common sense would indicate that, in these circumstances, CDOs should be valued on the same basis as if their underlying assets were held directly on the balance sheet. In practice this means that theu would be valued in line with any impairment of the income stream arising from them. But, common sense is something that our regulators appear to lack!
Barclays Bear Raid.
[info]ravendubya wrote:
Saturday, 17 January 2009 at 09:07 am (UTC)
The main reason for the fall in the banking sector late yesterday; was (imho) an organised bear raid from U.S hedge funds. I have traded the stock market for 27yrs and know only too well when an organised raid is taking place. The FSA should have left the short selling of banking stocks in place until a recovery within the sector had stabilised the situation. We are all well aware of the toxic debts on the balance sheets, but the share prices reflect s this as the banks are now trading on 30yr lows.

The media need to focus on yesterday?s falls in the last hour of trading; it was purely organised short selling. I have open long positions in RBS,LLOY and BARC as I see value at these prices which are trending 1978 lows.

Having watched the falls live through my level-2 system, it was extremely aggressive and out of character. The force of the shorts in Barclays must have been around 2 billion to bring the stock down to 95p within 30 minutes without any rumour of a profit warning.

Barclays had no choice but to come out and make a statement to protect share holder interests late last night.

Barclays quote:

Our results will be well ahead of analyst forecast; quoting we know of no reason for today?s fall in our share price.

The fall in Barclays share price was down to one reason and one reason only! Organised bear raid from U.S hedge funds.

How long will the FSA continue to see U.K banking stocks eroded to the floor once again?

Until the FSA step in with a new ban to protect share holder value, I see further share price erosion.


second phase of credit crisis
[info]bryanmcgrath wrote:
Saturday, 17 January 2009 at 10:08 am (UTC)
With the LiBOR rates returning to normal level with respect to bank rate, and bank rate at its lowest recorded level and still going lower by mid-year, the liquidity phase of the credit crunch is nearing the end (and possibly has ended).

Now for the solvency phase.

UK banks will continue to contract for at a couple of years in my opinion as they adjust to the loss of the "carry trade" funds present in the money markets until the 4Q of 2008. Given their business will contract by, say, 30% over the next couple of years, can a profitable business be constructed from what remains?

Undoubtably yes, but the businesses will need to contract further. Lloyds/HBOS will take a huge mauling, with 10s of thousands of jobs going, almost exclusively at Halifax in England and LloydsTSB in Scotland. At least something will survive, in my opinion. RBS, I think is beyond hope, it will be broken up, with European banks such as Santander favourite to pick up the UK retail arm.
Barclays Bear Raid
[info]mykleboon wrote:
Saturday, 17 January 2009 at 10:26 am (UTC)
When hedge funds tried shorting Volkswagen recently, Porsche sprang a classic bear trap. In an earlier stock market crash, the Hong Kong government bought shares on the Hang Seng to stabilise things. I am not sure, but I think that they subsequently sold out at a profit. Perhaps the UK government, probably in the form of the Bank of England, could support the shares of banks which it believes to be under short selling attack and whose values are out of line with those of other banks. One would not have to do this very often. A few burnt fingers should more than suffice!

Of course the Bank of England acting in this way would be some sort of insider trader. They, or the FSA, are probably in the best position to determine the RELATIVE values of different banks. If this is the case, then the risks are minimal.
second phase of credit crisis
[info]bryanmcgrath wrote:
Saturday, 17 January 2009 at 10:30 am (UTC)
With the LiBOR rates returning to normal level with respect to bank rate, and bank rate at its lowest recorded level and still going lower by mid-year, the liquidity phase of the credit crunch is nearing the end (and possibly has ended).

Now for the solvency phase.

UK banks will continue to contract for at a couple of years in my opinion as they adjust to the loss of the "carry trade" funds present in the money markets until the 4Q of 2008. Given their business will contract by, say, 30% over the next couple of years, can a profitable business be constructed from what remains?

Undoubtably yes, but the businesses will need to contract further. Lloyds/HBOS will take a huge mauling, with 10s of thousands of jobs going, almost exclusively at Halifax in England and LloydsTSB in Scotland. At least something will survive, in my opinion. RBS, I think is beyond hope, it will be broken up, with European banks such as Santander favourite to pick up the UK retail arm.
Allied Irish Bank
[info]bjchilds wrote:
Saturday, 17 January 2009 at 12:20 pm (UTC)
Ireland is not nationalizing Allied Irish Bank. It is nationalizing Anglo Bank. Please check your facts before publishing them.
Why is short-selling not fraud?
[info]ourmaninferney wrote:
Saturday, 17 January 2009 at 01:09 pm (UTC)
If I sell something that I don't own, it's considered fraud.

Short-selling consists of selling shares you don't own, but have borrowed.

Why isn't short-selling considered fraud, therefore?

And secondly, why would anyone lend shares to a known short seller? The value of the borrowed shares is expected to decrease, indeed it's the aim, so this seems a very curious way to behave with one's assets.
Re: Why is short-selling not fraud?
[info]gregooo99 wrote:
Saturday, 17 January 2009 at 02:58 pm (UTC)
ourmaninferney
What people don't realise is that you CAN instruct your broker not to lend out your shares to anybody. I am speaking for the US now but presume that this is the case in the UK. Obviously as a small shareholder you would make very little difference but I have seen it done succesfully here in the US when a group of shareholders managed it on a message board, albeit with a thinly traded stock and low float. Don't forget that institutions that have long positions would allow their shares to be shorted as they would, if they had any sense, have an option (probably a put) on the same stock to lock in the profits on the way down-thus being a "win-win" situation. Hope this explains it a little.
[info]drug_baron wrote:
Saturday, 17 January 2009 at 03:08 pm (UTC)
The stockmarket as we know it; is an outdated model that cannot work in the modern world. How can you rationalize investing other peoples money vizaviz (pensions and lifesavings) in a glorified gambling cum bingo machines alias the "stockmarket".

The modern financial fiasco is just a situation where the gamblers namely the hedge fund managers and derivative mangers are no longer able to settle their gambling debts resulting in people losing their life savings and pensions.

Indays gone by these people were called pirates; nowaday the sons and daughters of pirates dress up as city bankers and conn the world in parting with our; after all we are the fools who bought into the scam.
[info]robber2 wrote:
Thursday, 17 September 2009 at 09:03 am (UTC)
Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the Cheap wholesale markets that underpin mortgage and other loans...