Tuesday, January 29, 2008

Existing business models of some financial institutions are under strain as a result of adverse market conditions;

FSA publishes its 2008 Financial Risk Outlook

The Financial Services Authority (FSA) today published its Financial Risk Outlook (FRO) warning firms and consumers of the risks inherent in a significantly less benign economic environment. Its central scenario identifies the following five priority risks: (1) Existing business models of some financial institutions are under strain as a result of adverse market conditions;

Posted by jack c @ 03:44 PM (1745 views)
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9 thoughts on “Existing business models of some financial institutions are under strain as a result of adverse market conditions;

  • All we need now is a leak on which ones are under pressure and another run Northern Rock style will be under way.

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  • Just what is the point of saying that they know that some institutions may be in trouble – and then not saying which ones?

    Is it so that when the sh!t hits the fan they can say they told us it would?

    All they have done now is made everyone more suspicious. That’s hardly going to help sort anything out is it?

    “Market participants and consumers may lose confidence in financial institutions and in the authorities’ ability to safeguard the financial system;”

    Well their statement is a good start along the way to giving people that impression.

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  • Just seen a good write up about which banks are riskier than others for keeping savings in:

    http://www.moneyweek.com/file/41437/credit-default-swaps-how-to-spot-the-riskiest-banks.html

    – if I could remember which e-mail account I used to get a password on this site, I’d post it as an article. It’s well worth as look.

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  • “A significant minority of consumers could experience financial problems because of their high levels of borrowing”

    WTF is a “significant minority”? Does he mean a “significant number”?

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  • It’s hard to believe we have an FSA – what do they actually do?
    They knew how Northern Wreck were carrying on a year before the run but seem to have done nothing to prevent it. Did they issue warnings on the risk of CDOs? High LTVS? Inappropriate credit card lending? Subprime/BTL? The risk of HPC? Someone did say that banks should stress test whether they could withstand a 40% drop in house prices, but I don’t recall who it was?
    Are IFAs regulated by the FSA? The ones I’ve met were useless – they just gave standard advice, telling me to get into the latest bubble. I raised my eyebrows when one said (in November 2007) get into a commercial property fund and they still insisted there were good returns to be had!

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  • @ cornishman – here is the article you are talking about – Credit default swaps: how to spot the riskiest banks

    The whole point about the ‘credit crunch’ – is that it means banks won’t or can’t lend as easily or as cheaply as they once did. The reason for this is that they are under-capitalised, either because losses have eroded their capital base or because they have had to take off-balance sheet loans back onto their books (in reality, much the same thing).This is a glorified way of saying that some banks are (at least technically) bankrupt. Now, the system doesn’t like to admit such things – for obvious reasons – so we can expect the banks along with the central banks, such as the Bank of England and the regulators such as the FSA to lie about it. As such, it is highly unlikely that any bank will be allowed to fail (witness Northern Rock, which isn’t even a real bank) but that doesn’t stop the markets having a view as to who they are least comfortable lending to and which banks therefore need to pay more to get their hands on the cash they need to keep operating. We can get a view on this by looking at the interest rates the banks off to us on their savings accounts – the higher the rate clearly the more desperate they are for cash. However another way to gauge the risk of your bank account it is too look at the credit default swap market. Credit default swap (CDS) spreads measure the premium to the risk-free interest rate that a bank can expect to pay in the market for 5-year loans. The higher the CDS for any given bank, the riskier the market thinks that particular bank’s debt is. So what is the market telling us now? Riskiest of all the major banks is HBOS, with a senior 5-year debt premium of 78 basis points (0.78% above the 5-year gilt yield of 4.3%, i.e. 5.1%). 5.1% is therefore what they have to pay the market for funds. (If they’re paying you much less that’s not a good risk/reward). RBS, Santander (Abbey National) and Barclays aren’t much better but HSBC and Lloyds are considered by the market to be the safest. If you can get a good rate from either of these banks, then given the risks the market thinks you’re taking, that’s a good deal and you should be able to sleep well at night. I haven’t mentioned the ex-building societies yes just because they are in a group of their own. Northern Rock doesn’t have CDS prices and new savers aren’t protected beyond the legal norms, so obviously I wouldn’t recommend putting your savings there. However, the similarly structured (but slightly less geared) Alliance & Leicester and Bradford & Bingley both have 5-year CDS spreads that are flashing major warning signs. When these banks give you a higher savings rate, it’s not because they’re being generous, it’s because they have to compete for funds with rather more secure institutions. Alliance & Leicester is being made to pay 200 basis points (2%) over the odds for 5-year money (i.e. about 6.33%) so no wonder they are offering savers in excess of 6% – they have to in order to get any funds at all. The implication is that a high savings rate from Alliance & Leicester reflects a higher risk that you won’t get your money back. Such fears obviously only apply to people with very large sums because the system insures savers up to a certain amount (£35,000). Still, I don’t think you want to have your life savings in a bank that the bond market views with such suspicion. The same goes for Bradford & Bingley. Here too, the spread over risk-free 5-year money is very nearly 2%. The credit market won’t lend to BB/ over 5 years unless BB/ pays nearly 6.3%.The question you have to ask yourself is: should you accept anything less? Then, there are the foreign banks who are offering us internet savings accounts. The basic rule of thumb here is: if they’re ING, they’re no worse a risk than a UK high Street bank. If they’re Irish, they’re likely to be over leveraged and a bit more of a worry (especially Anglo Irish Bank). But if they’re Icelandic, then be afraid; these banks are starting to be priced for bankruptcy risk and it’s not clear what protection UK savers might have with these foreign accounts. Kaupthing is now having to pay almost 6% more than 5-year government bond yields (i.e. 10.2%) to raise funds. Kaupthing’s savings account pays just 6.5% AER, which doesn’t even come close to compensating us for the risk I’d say. The markets seem to be telling us that there is a very real default risk here. Glitnir Bank is not much better and even Landsbanki (owner of the popular Icesave internet banking business) has to pay the credit markets 3.2% more than risk-free rates and 2.45% more than ING does, for funds. Given that Icesave pays 6.3% on their easy access internet savings account and ING pays 5.15%, perhaps shopping around for the highest savings rate right now is not actually the best thing to do. Perhaps, just perhaps, we should pay more attention to the risk side of the equation too. So who’s best on the risk/reward basis? Lloyds TSB has the lowest current CDS spread (0.6%) of any UK bank and the third lowest of any European bank (after Fortis and BNP). For one year, Lloyds’ internet account is paying 5.75% (dropping to 4.75% after one year is up) as long as you have £100,000 to save. This looks like the safest place to park your savings for the time being if the credit markets are anything to go by.

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  • crash bandicoot says:

    They were focusing on this article on the news tonight but discussing the individual borrower side of it. Apparently if you have borrowed a large amount at a high income multiple you are more likely to default on your mortgage. Comming up next month, if you walk in the woods you are more likely to step in bear poo!

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  • tyrellcorporation says:

    Nice one Cornish, I’ve pulled out some of my money from Icesave and will look around for a safer bet in the next few days. A finance friend said to me about 6 months ago that the whole of Iceland’s finance sector was a teetering Hedge Fund and actually pretty dodgy. He grimmaced when I said I had a significant deposit with Icesave.

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  • tyrellcorporation says:

    …if you walk in the woods you are more likely to step in bear poo!

    More like a pile of fizzy pop bottles and Wotsit wrappers if you live in the UK!

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