Vulnerable British Banks 2008

Given concerns over the financial system, many British savers may be anxious about the future of British banks.

Yesterday, shares in HBOS fell 18% (at one point in the day it had fallen 35%.) Shares in Barclays and Royal Bank of Scotland also posted double digit falls.

British banks are not directly exposed to the same sub-prime mortgages as in America. However, they are indirectly exposed to the problems stemming from America. The problem is that banks no longer just rely on deposits to make loans and mortgages. They rely on lending a mortgage and then being able to re-bundle the debt onto other financial institutions. With Lehman Brothers going under, this business plan only becomes more difficult.

The reason that Northern Rock got into difficulties, last year was that it had the highest ratio of mortgages financed by reselling rather than deposits.

British banks will also be increasingly vulnerable from the state of the housing market. With house prices falling, the number of negative equity is increasing. A recession and rising unemployment could create a real problem of bad debts in the UK.

What Should I do With My Savings?

I think the Banking system will be able to weather the storm, although the government dithered over Northern Rock, at the end of the day they realised they couldn’t let it go under.

However, these are not normal times, there is a lot to be said for diversifying your life savings. Don’t put all your wealth into one financial institution. Consider Northern Rock or National savings, both of which are guaranteed by the government.

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2 thoughts on “Vulnerable British Banks 2008”

  1. With regards to new accounts wth Northern Rock please note the following below:

    On September 17th, the UK Government said that it would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets. On September 20th the UK Government confirmed that the guarantee would cover all accounts existing at midnight on Wednesday 19th September, as well as future interest payments, movements of funds between existing accounts, and new deposits into existing accounts. It would also cover accounts reopened by those who had closed them between September 13th and 19th. The UK Government also extended its guarantee to cover existing and renewed wholesale deposits and existing and renewed wholesale borrowing which is not collateralised. On 21 September the UK Government clarified that renewals of existing uncollateralized deposits and wholesale borrowing and retail bonds (in each case up to the same maturity) would be covered for the term of the renewal. The guarantee provides further comfort with regard to the Prime-1 rating. The guarantee from the UK Government was provided in an attempt to restore calm to retail depositors and to stop the significant outflow of retail deposits that Northern Rock was facing in that period. This outflow has significantly reduced the deposit base of Northern Rock weakening its already challenged liquidity position and we believe that the bank is unlikely to be able to generate significant deposit inflows in the future.

    In short there are no guarantees on new accounts!

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