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Debt & Derivitive Ratios For Banks

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I'd like to gather information on the following ratios for banks...

1)Deriavtives/Assets

2)Derivatives/Equity

3)Derivatives/Market Cap

4)Derivatives/Deposits

5)Loans/Equity

These ratios give a clear indication of how vulnerable the banks are.

UK Banks I suspect are the safest are:

Tesco

Coop

Nationwide

HSBC

(probably in that order)

But I want more info on these banks to confirm it since U.K banks in general are extremely leveraged.

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I'd like to gather information on the following ratios for banks...

1)Deriavtives/Assets

2)Derivatives/Equity

3)Derivatives/Market Cap

4)Derivatives/Deposits

5)Loans/Equity

These ratios give a clear indication of how vulnerable the banks are.

UK Banks I suspect are the safest are:

Tesco

Coop

Nationwide

HSBC

(probably in that order)

But I want more info on these banks to confirm it since U.K banks in general are extremely leveraged.

There are a few of us here who might think that your question is over simplified.

I think that you need to clarify your question with respect to "derivatives".

Do you mean :

- OTC derivatives or both OTC and exchange traded derivatives?

- Gross notional by underlying?

- Net notional by underlying?

- Gross positive mark to market?

- Gross positive mark to market net of collateral?

- Net mark to market?

- Net mark to market net of collateral?

The answers to the top of the table are "scary", the answers to the bottom of the table are comforting.

As others have said before, the lack of understanding about how derivatives and their associated collateral arrangements work results in an inappropriate level of fear which is expensive for shareholders who are now often the taxpayers.

Edited by LuckyOne

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Thanks for clarifying that.

Really for derivatives it would be any one of those that is standardized and where the info is readily available, making it easy to collect and useful to compare.

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Thanks for clarifying that.

Really for derivatives it would be any one of those that is standardized and where the info is readily available, making it easy to collect and useful to compare.

If you want to do the work, you can trawl through the annual reports of all of the banks that you are interested in.

There is usally an "investor relations" tab on their websites with their financials.

For example, HSBC's can be found here :

http://www.hsbc.com/1/PA_1_1_S5/content/as...sbc2008ara0.pdf

In my opinion, looking at derivatives is a red herring. The real risk is in funded trades (credit card and auto loan ABS, CMBS, RMBS, Corporate CDO holdings etc).

A particular, murky risk is the trades funded by the bank sitting in non-consolidated SPVs / SIVs / VIEs etc where the banks still have the risk but don't need to consolidate it under FIN 46 and therefore don't disclose the exposure.

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If you really want to be safe you should not go with a bank that uses derivatives for any other purposes than hedging, and after knocking out those that do (which will also probably knock out any with toxic debt), you should probably look at the banks with the safest mortgage/deposit ratio i.e. the most retail deposits per mortgage. Nationwide is probably the best bet if you are ruling out Northern Rock, which is obviously safest of all right now.

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If you really want to be safe you should not go with a bank that uses derivatives for any other purposes than hedging, and after knocking out those that do (which will also probably knock out any with toxic debt), you should probably look at the banks with the safest mortgage/deposit ratio i.e. the most retail deposits per mortgage. Nationwide is probably the best bet if you are ruling out Northern Rock, which is obviously safest of all right now.

This is a key measure.

Another is their liquidity i.e. the maturity profile of their assets and liabilities.

The cynic in me says that none of this really matters anyway as every bank in the G8 is too big and too systemically important to fail in the current situation. As long as you stay away from small / developing market jurisdictions just for the sake of a few basis points, you should be fine.

The time that it will become more important to understand the risk of your bank will actually be when the situation stabilises a bit and banks in the G8 will be allowed to fail again once the systemic risk of a bank failure has been reduced. We are nowhere near that stage yet.

Edited by LuckyOne

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If you want to do the work, you can trawl through the annual reports of all of the banks that you are interested in.

There is usally an "investor relations" tab on their websites with their financials.

For example, HSBC's can be found here :

http://www.hsbc.com/1/PA_1_1_S5/content/as...sbc2008ara0.pdf

Thanks, I was hoping that there was already a report out there which had done this. I haven't seen one yet. If I can't find one I think I'll pay someone to do the research.

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The cynic in me says that none of this really matters anyway as every bank in the G8 is too big and too systemically important to fail in the current situation. As long as you stay away from small / developing market jurisdictions just for the sake of a few basis points, you should be fine.

The time that it will become more important to understand the risk of your bank will actually be when the situation stabilises a bit and banks in the G8 will be allowed to fail again once the systemic risk of a bank failure has been reduced. We are nowhere near that stage yet.

When the situation stabilizes banks won't be at risk and governments will be more able to support them. Right now if there is a second wave to the crash the strain on governments to bail out banks will be tremendous, and the guarantee scheme in itself is flawed as it further strains banks so will help cause banks to fail, and in addition I don't think there is enough in the FCIS fund to cover people's deposits, and the government says it will back it up, but it is already has a massive debt burden it is struggling to handle.

What if the FSCS didn’t have enough money?

The FSCS has a cap on how much cash it can levy per year from financial institutions; from 1 April 2008 the overall capacity was set at just over £4 billion. Yet in the FSA’s review document (page 77), it admits that £4 billion wouldn’t even cover the twenty-fifth biggest UK deposit taker, so it's nowhere near enough for the big banks!

Thankfully, FSA documents also confirm...

"5.51 The Government will therefore include provision in the forthcoming legislation to allow the National Loans Fund to lend to the FSCS. These loans will have to be repaid, with interest charged at appropriate market rates, out of future levies on the industry, as well as from the share of recoveries from the estate of the failed bank that accrue to the FSCS."

Which in a nutshell means if the fund didn’t have enough cash, the Government will lend it the money, and it will then try and get it back from the insolvent bank’s assets and by putting a levy on the banks for years to pay it back. This has since happened; the FSCS money that was used to help push through the takeovers of Bradford & Bingley and Kaupthing was borrowed from the government and will be paid back in future years.

This wasn’t always the case though. Less than a year ago it seemed there was no back up plan. The first we heard of the Government's willingness to back the scheme up was actually due to a TV programme..

In May 08, as part of my ‘How Safe are your Savings’ programme I managed to get an interview with the Cabinet Minister responsible, Chief Secretary to the Treasury Yvette Cooper, MP.

During the interview, I kept pushing the question that the FSCS didn’t have enough money to cover even the 25th biggest bank, her continued answer was thatthe government would ensure the £35,000 (the compensation level at the time) was paid out.

The problem was, when I asked her how, or did this mean the government would pay out instead, she simply wouldn’t give specifics, and I was left with the feeling it was more spin than substance.

This was deeply frustrating, how can you promise security but without explaining how you’d do it? The interview was done the day before transmission; the next day just yet before the programme went out we got this statement from the Treasury.

"In the unlikely event a major bank became insolvent the Government would ensure that the FSCS has access to enough immediate funding to pay out depositors in a timely manner, through borrowing from the Government or Bank of England. The FSCS could then levy up to £4 billion per year from the financial services industry to cover the costs of compensation"

It was a triumph, by pushing we got a clarity of answer that has since become part of official policy. Sometimes having a go does work!

See: http://www.moneysavingexpert.com/savings/safe-savings

People are fully aware that the government schemes simply pass the bill onto the taxpayer. so there tolerance of big bailouts is weakening. Politically the government is between a rock and a hardplace.

Assuming the government could cover the money you have in the bank, there will still be a period of chaos when people realize their funds are at risk. Mass withdrawels (like we saw with NR) are likely and that could clog up the system making it hard to get at your money. It could take a long time before the government processes the deposit scheme leaving people without access to their money. If it got out of hand it is not unrealistic for government's to put a temporary ban on withdrawels.

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Btw, just FYI there isn't a good way to assess the total amount of "derivatives" which is half the problem.

What you probably want to know is total credit risk. The OCC in the US does publish this for US commercial banks but sadly as far as I know you can't get similar stats for UK banks/building socs.

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