Have We Beaten the Banking Blues?


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In the US, confidence that the credit crisis is easing increased after the Treasury announced on 9thJune that 10 banks were in a position to pay back bail-out support received under the $700 bi

In the US, confidence that the credit crisis is easing increased after the Treasury announced on 9thJune that 10 banks were in a position to pay back bail-out support received under the $700 billion Troubled Asset Relief Programme (TARP).

The banks will repay a combined $68 billion including $25 billion from JP Morgan and $10 billion from Morgan Stanley.

The $68 billion that will be repaid is much more than expected. The Treasury had previously conservatively calculated that $25 billion would be repaid this year.

Over in the UK, Lloyds Banking Group has also repaid ?2.3 billion ($3.7bn) to the UK Treasury. This announcement came before the US one and Lloyds is thought to be the first major bank in the Western world to have repaid state equity after governments took action last October to stabilise the banking system.

Over in the Eurozone, however, the picture is a little different, with the European Central Bank (ECB) warning that Eurozone banks are facing additional writedowns of over $283 billion by the end of 2010.

In its latest Financial Stability Review, published on 15th June, it said that: “Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough. The deterioration in the macro-financial environment has continued to test the shock-absorption capacity of the Euro-area financial system. Prospects for a significant turnaround in the short term are not promising?.

Many of the banks? losses are expected to come from loan exposures. According to the report, the risks to the stability of the financial sector remained high and ?uncertainty prevails over how well the banking system would be able to absorb any further shocks?.

The potential risks include renewed loss of confidence in the financial strength of large banks; larger than expected further falls in US property prices; becoming too reliant on emergency liquidity and a worse than expected economic downturn in the Euro area.

It is estimated that Eurozone bank losses will reach $649 billion by late 2010. $218 billion relates to securities, which have largely already been written down, and $431 billion to loans. So far $150 billion of loan losses has been written down.

BNP Paribas currency chief, Hans Redeker, lamented that European banks had not taken the opportunity to rebuild their capital reserves during the credit thaw. ?US banks have raised $85 billion since the stress tests, while Europe?s banks have raised just $7.5 billion. This is going to go pear shaped in coming months as people lose confidence in the whole crisis management of Europe?.

The ECB was confident that the largest banks could survive any further economic deterioration. ?most [large banks] appear to be sufficiently well capitalised to withstand severe but plausible downside scenarios?. It did, however, warn banks that ?there is no room for complacency? and encouraged them to take advantage of state support quickly to protect themselves from ?contagion risks?.

The Central Bank expects the Eurozone to return to positive quarterly growth in the middle of 2010.

A few days prior to the Review?s release, the ECB?s financial stability expert, Dejan Krusec, had told a Fitch Ratings conference that banks would have a problem if the economic downturn extends into next year. If there is a quick ?V-shaped? recovery the banks should be strong enough to survive the downturn, but ?if this is ?U-shaped?, the banks will have problems? The problem is not 2009. Euro-area banks are well enough capitalised to cover losses. The problem is 2010. We are concerned about the length?.

The International Monetary Fund (IMF) has also called on the European authorities to take action to clean up their banks. In an April report it forecast that writedowns for this year and next would be $750 billion. From this May to end 2010 they would be $540 billion ? almost double the calculations in the ECB?s Financial Stability Review.

At the same time the ECB review was published, Moody's downgraded 25 Spanish banks as rising defaults eat into reserves, explaining:

?The extra cushion that banks had built up over the years against such risks is becoming increasingly thin. Unless some supportive measures are taken by third parties ? by owners, or likely by the government ? some banks' capital cushions will soon be affected by asset impairments?.

While there is increasing optimism that the US and UK economies will recover sooner than previously expected, and that financial systems are getting stronger, the risks of a bank collapsing have not completely gone away.

In the UK, for example, financial services research firm TowerGroup warned that five building societies could fail on the lines of Dunfermline Building Society within a year or so, while 15 others could be forced to merge.

Ralph Silva of TowerGroup said that ?most building societies have waited too long before asking for help and the result will be some will be too far along to be saved?. In the case of the other 15, they will merge into other entities, rather than disappear completely. The only one he feels confident about is Nationwide.

Should a bank fail, the UK, Europe, Isle of Man and Guernsey have depositor compensation schemes in place to refund savers, up to a limit. Jersey has only just announced its Depositors? Compensation Scheme. The draft regulations will be debated by the States on 14th July. It is proposed that compensation will be limited to ?50,000 per person per banking group (as in the UK, Isle of Man and Guernsey). The scheme will be capped at ?100 million in any five year period.

In the case of Guernsey, its scheme came too late for those with savings in Landsbanki which collapsed last October. Savers have so far received 30p in the pound of their money back. In May administrators Deloitte announced that they will now get a further payout of 15p to 25p in the pound in August and that the expected eventual payout will be between 68p to 89p in the pound.

Savers with Kaupthing Isle of Man which also failed in October have had to endure a long complicated procedure to find out when and how they will receive this money back ? and this in spite of the Isle of Man having a depositors? compensation scheme in place. They have so far received advance payments of ?10,000 per depositor and the Isle of Man Government has now said they should start to receive compensation payments from August. Those with savings above the ?50,000 limit are expected to receive around 80% of their money back.

If you would like your life savings to have higher investor protection than that which can be offered by a bank, speak to an experienced and regulated financial advisory firm like Blevins Franks Financial Management to find out what options are available to you.

By Bill Blevins, Managing Director, Blevins Franks

19th June 2009

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