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Sancho Panza

Rbs Puts £38Bn In 'bad Bank' Amid Big Loss

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Sky/Yahoo 1/11/13

'Royal Bank of Scotland (LSE: RBS.L - news) has confirmed it is placing £38bn of toxic loans in an internal 'bad bank' and a quarterly loss of £634m as it continues to pay the price for the mistakes of its past.

As previously reported by Sky News , RBS said the high risk assets would be split off to avoid a full break up of the bank - a move the Chancellor had been considering since the summer as part of efforts to aid its recovery following the taxpayer bailout of 2008.

It is understood £9bn of those assets relate to its troubled Ulster Bank arm, which was damaged by the fallout when Ireland (Other OTC: IRLD - news) 's property boom subsequently collapsed.

The bank also confirmed its £634m pre-tax loss in the third quarter included a further provision of £250m related to the Payment Protection Insurance (PPI) scandal.

But it was the results of the Treasury's four-month review which dominated Friday's wealth of announcements on RBS - meaning it avoided a threatened carve-up and nationalisation of its problem loans.

New chief executive Ross McEwan said the bank had now started a full review of the lender, which will report back in February, to "create a bank that can reward the faith of UK taxpayers and all our investors."

As part of renewed efforts to concentrate on retail banking - serving UK consumers and businesses - the sale of its Citizens US banking subsidiary is to be speeded up with a partial flotation next year.'

Independent.ie 1/11/13

' ULSTER Bank is likely to remain open in Ireland after its parent company apparently decided against shutting down the Irish lender.

Royal Bank of Scotland, which is owned by the British government, is set to unveil a huge restructuring plan on Friday when it publishes its third-quarter results.

As part of the restructuring plan, RBS will create an internal "bad bank" where it will move as much as €47bn worth of so-called "toxic assets".

Much of those loans will come from Ulster Bank, which lent havily in Ireland during the boom.

Those loans will be run down more aggressively than the rest of the bank's performing loans.

The UK government has bailed out RBS to the tune of around €54bn since 2008 in an effort to stave off its collapse. About €16.9bn of those funds have been pumped into Ulster Bank.'

Irish property down 50% + from peak

Uk property down 10% or so.

Edited by Sancho Panza

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Hmmm..

Why do I get the impression that they are going to do a fire-sale of the 'Good RBS' just prior to the next election, allowing for a bumper payday for the City and saddling the next government with 'Bad RBS'. Which will of course turn out to be a spectacularly bad deal all round..

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So Ulster Bank 'was damaged by the fallout when Ireland's property boom subsequently collapsed.' Damaged by fallout eh? It sounds like they were innocent bystanders. Poor them.

Also, what the heck does running down a loan aggressively mean?

Q

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You will be interested to know that of the 10,000's of people in years of arrears with Ulster Bank, almost none of them have been repossessed. Stats show that more and more people are deciding not to pay back their Ulster Bank mortgages so the UK tax payer in likely to encounter larger losses here in the future.

Banks won't repossess here ass they don't want to add stock to the market - they are trying to push up property prices here by restricting stock floes to the market, hence the thousands and thousands of abandoned and empty properties dotted around the country.

In a way the banks are pumping up Irish house prices at the expense of the UK tax payer. Why not, they are willing to pick up the tab, then the once Irish price are back to boom time Ulster Bank can collect juicy rents interest on all of the overpriced property, just like they do in the UK.

It's an international scandal of epidemic proportions.

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Hmmm..

Why do I get the impression that they are going to do a fire-sale of the 'Good RBS' just prior to the next election, allowing for a bumper payday for the City and saddling the next government with 'Bad RBS'. Which will of course turn out to be a spectacularly bad deal all round..

What they're already doing with LloydsTSB you mean?

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38 billion pounds, that'll take quite a few years of work from the "good" bank to pay off, won't it?

Oh wait, we already paid it off, and will pay off any more?

I wish I had a business where I could keep all the good bits and give all the loss-making stuff to everybody else to pay for, I wouldn't feel that good about myself but hey I'd get over it.

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You will be interested to know that of the 10,000's of people in years of arrears with Ulster Bank, almost none of them have been repossessed. Stats show that more and more people are deciding not to pay back their Ulster Bank mortgages so the UK tax payer in likely to encounter larger losses here in the future.

Banks won't repossess here ass they don't want to add stock to the market - they are trying to push up property prices here by restricting stock floes to the market, hence the thousands and thousands of abandoned and empty properties dotted around the country.

In a way the banks are pumping up Irish house prices at the expense of the UK tax payer. Why not, they are willing to pick up the tab, then the once Irish price are back to boom time Ulster Bank can collect juicy rents interest on all of the overpriced property, just like they do in the UK.

It's an international scandal of epidemic proportions.

I swear they'll reach the stage where they evict people and then demolish their houses to support prices..

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You will be interested to know that of the 10,000's of people in years of arrears with Ulster Bank, almost none of them have been repossessed. Stats show that more and more people are deciding not to pay back their Ulster Bank mortgages so the UK tax payer in likely to encounter larger losses here in the future.

Banks won't repossess here ass they don't want to add stock to the market - they are trying to push up property prices here by restricting stock floes to the market, hence the thousands and thousands of abandoned and empty properties dotted around the country.

In a way the banks are pumping up Irish house prices at the expense of the UK tax payer. Why not, they are willing to pick up the tab, then the once Irish price are back to boom time Ulster Bank can collect juicy rents interest on all of the overpriced property, just like they do in the UK.

It's an international scandal of epidemic proportions.

I read some US research a few years ago (via Mr Mortgage aka Mark Hanson) that showed that people tended to default when negative equity hit and not as a result of being unable to service their interest bill.

Once the UK starts it's inevitable descent into HPD,then it's going to be all over-again-for UK mortgage lenders.

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I tend to believe that you can only have house price inflation if you continuously make the cost of servicing new mortgages cheaper by:

1) Reducing borrowing costs - looks like that is at the end of the road

2) Increasing wages in relation to the cost of housing - Globalization killed that around 2000

Price deflation can only happen if People (Banks) are willing and able to sell at lower prices.

When you look at what the deflation here in Ireland the ability to service mortgages decreased. Unemployment shot up as a large proportion of people were in the building trade. What tipped the building trade over the edge is that they had brought forward future demand as muich as they could by creating thousands of new properties.

In theory the UK could free up planning, create thousands of jobs that would feedback into the economy and produce thousands of new homes. I think that this process is starting at the moment and it will be a success as long as things don't go overboard - but then who wants to stop the party? Of course the boomers will whinge as it is a direct wealth transfer from their sacred restricted supply of land with planning to the younger generation - like money printing redistributes the currency to the printer, granting planning redistributes property wealth'..

It's still looking rather deflationary to me over the medium term, given that borrowing costs can't go any lower and wages will not be growing above inflation for many many years.

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I read some US research a few years ago (via Mr Mortgage aka Mark Hanson) that showed that people tended to default when negative equity hit and not as a result of being unable to service their interest bill.

Once the UK starts it's inevitable descent into HPD,then it's going to be all over-again-for UK mortgage lenders.

This is true for the US because the banks' claim is only on the house and it cannot pursue and bankrupt the borrower. In the UK the claim is on the individual, using the house as security. Therefore it makes sense in the US to walk away from a property once it goes into negative equity.

Prior to 2007 there had never been a market wide drop in property prices so this was not seen as a significant weakness in the American system.

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This is true for the US because the banks' claim is only on the house and it cannot pursue and bankrupt the borrower. In the UK the claim is on the individual, using the house as security. Therefore it makes sense in the US to walk away from a property once it goes into negative equity.

Prior to 2007 there had never been a market wide drop in property prices so this was not seen as a significant weakness in the American system.

Worth saying that in nominal terms this is also true for the UK prior to 2007, the only exception being a relatively small (if noisy and middle class) number of buyers in the SE who bought circa 1985-87. Nominal is what counts as far as negative equity goes.

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I read some US research a few years ago (via Mr Mortgage aka Mark Hanson) that showed that people tended to default when negative equity hit and not as a result of being unable to service their interest bill.

Once the UK starts it's inevitable descent into HPD,then it's going to be all over-again-for UK mortgage lenders.

This is true for the US because the banks' claim is only on the house and it cannot pursue and bankrupt the borrower. In the UK the claim is on the individual, using the house as security. Therefore it makes sense in the US to walk away from a property once it goes into negative equity.

Prior to 2007 there had never been a market wide drop in property prices so this was not seen as a significant weakness in the American system.

No, here in Ireland mortgages are recourse and the lender can chase you for the outstanding forever.

People here have just refused (and continue) to not pay their mortgages. What can the banks do? Repossess everyone? Flood the market with property and further reduce the value of their assets?

Similar position to the UK. If 50% of people stopped repaying their mortgage, just what are the banks going to do?

I think the conclusion that people in negative equity default is true. What is the motivation to repay when you are £100k underwater?

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No, here in Ireland mortgages are recourse and the lender can chase you for the outstanding forever.

People here have just refused (and continue) to not pay their mortgages. What can the banks do? Repossess everyone? Flood the market with property and further reduce the value of their assets?

Similar position to the UK. If 50% of people stopped repaying their mortgage, just what are the banks going to do?

I think the conclusion that people in negative equity default is true. What is the motivation to repay when you are £100k underwater?

Repo and sell it cheaper to a new borrower? Those with un-payable loans are not a big slice of the market if 1/3 rent, 1/3 own outright and 1/3 have some kind of mortgage but many will always manage to pay it even if rates go up? Some price drops at the margins might get the crash going though, which is probably why they don`t,(repo so much) so new loans are not as important yet as trying to look solvent on paper it seems? Would have to be a crash of some magnitude (Ireland) to get 50% of people not to pay back though.

Edited by dances with sheeple

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Reading this:

http://ftalphaville.ft.com/2013/11/01/1683492/the-pictorial-rbs-capital-resolution-group/

Suggests that just calling the Bad Bank "ulster bank" and cutting it loose would have the desired cleaning effect.

UB being the biggest issue in both core and non core divisions on many metrics.

Lots of CRE in the non core bank... though I suspect that includes incomplete residential estates.

With Allied and Danske as much use a chocolate tea cups the only chance for future banking in NI might be a rehabilitated UB - sorting UB might be cheaper than the UK taxpayers as whole having to subsidise NI even more.

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Repo and sell it cheaper to a new borrower? Those with un-payable loans are not a big slice of the market if 1/3 rent, 1/3 own outright and 1/3 have some kind of mortgage but many will always manage to pay it even if rates go up? Some price drops at the margins might get the crash going though, which is probably why they don`t,(repo so much) so new loans are not as important yet as trying to look solvent on paper it seems? Would have to be a crash of some magnitude (Ireland) to get 50% of people not to pay back though.

So why not do that here in Ireland rather than holding the borrower to ransom and milking them for every spare penny they can. In the long run you know the banks will take back the property 'once it's gone up in value'

Most of the crash is down to perception though. I could still see London crashing 50% and after it did crash 50% people would look back and say who the hell would pay a million for that 2 bed Victorian terrace just like they do here in Ireland today. It's only the belief that it is worth that much keeping property up there, hence the continuous ramping and propaganda (from the BBC) that is required.

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So why not do that here in Ireland rather than holding the borrower to ransom and milking them for every spare penny they can. In the long run you know the banks will take back the property 'once it's gone up in value'

Most of the crash is down to perception though. I could still see London crashing 50% and after it did crash 50% people would look back and say who the hell would pay a million for that 2 bed Victorian terrace just like they do here in Ireland today. It's only the belief that it is worth that much keeping property up there, hence the continuous ramping and propaganda (from the BBC) that is required.

Maybe not enough willing borrowers to replace them?

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This is true for the US because the banks' claim is only on the house and it cannot pursue and bankrupt the borrower. In the UK the claim is on the individual, using the house as security. Therefore it makes sense in the US to walk away from a property once it goes into negative equity.

Prior to 2007 there had never been a market wide drop in property prices so this was not seen as a significant weakness in the American system.

That's only true of 12 states listed below.Apologies for being unable to provide the research I cite.

http://www.forecloseddreams.com/recourse_states

'Non-Recourse States

Alaska

Arizona

California

Connecticut

Idaho

Minnesota

North Carolina

North Dakota

Oregon

Texas

Utah

Washington'

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This is true for the US because the banks' claim is only on the house and it cannot pursue and bankrupt the borrower. In the UK the claim is on the individual, using the house as security. Therefore it makes sense in the US to walk away from a property once it goes into negative equity.

Prior to 2007 there had never been a market wide drop in property prices so this was not seen as a significant weakness in the American system.

I misremembered his point.

http://mhanson.com/archives/321

'2) Principal Balance Reduction Benefits are Overstated

As a career mortgage banker until 2006 — when it became blatantly obvious mortgage and housing was going to fall off a proverbial cliff and I left the industry to pursue other ventures – I am confident that the primary default driver has more to do with the back-end (total) debt-to-income ratios on the average legacy loan and loan modification being in the stratosphere than negative equity. In fact, on the average HAMP loan modification the median back-end DTI is ~65% of gross income. A household paying 65% of their GROSS monthly income to debt service each month — that can’t save, spend or vacation — is a massive credit risk, plain and simple.'

Not the piece I remember reading,but it makes his point,even if it's unscientific.I think generally speaking,when it's a big enough hole,people just stop digging.

For those who don't know Mark Hanson,he called Lehman out 5/4/2008

Edited by Sancho Panza

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Hmmm..

Why do I get the impression that they are going to do a fire-sale of the 'Good RBS' just prior to the next election, allowing for a bumper payday for the City and saddling the next government with 'Bad RBS'. Which will of course turn out to be a spectacularly bad deal all round..

I am not sure after reading Robert Peston's take on the review and the ceo email that there is a 'good bank'. Rates are low and the drive for competition high margins are thin. Political pressure to lower rates, forebearance on borrowers, Housing transactions are low. To raise capital they are having to sell off best bits.

Zombie bank.

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