UnHelpful Banking

Via Paul at HPC.

Nope, sorry, still not big enough to be "too big to fail"

For the benefit of the majority of people who talk a lot about banks, but have never bothered looking at a bank balance sheet, here's the RBS balance sheet as at 30 September 2009 (full results here, pdf):
1. The only bits that the real world cares about are:

A. Loans and advances to customers of £631 billion. This is real money that real people (mortgage borrowers, credit card holders, businesses) are contractually bound to repay to the bank. Buried away in 'Other assets' of £102 billion are a few quid for proper fixed assets, buildings, safes, IT systems and so on.

B: Customer deposits, which are on the liabilities side of course, of £483 billion. This is real money deposited by real people, and the banks are contractually obliged to repay them when they ask for it.

All the rest of it is jiggery pokery, and even if I could explain what it all is and people understood it, that's of no real interest to real people in the real world.

2. We also know that the UK government has historically given implicit or explicit guarantees to depositors (which is fair enough, apart from the fact that the banks didn't pay for the insurance). So, next time RBS is in a bit of a mess, there's no reason why the government or the bankruptcy courts or whoever shouldn't do something similar to what they did with Bradford & Bingley or Northern Rock, which is to write down A to its market value (knock off twenty percent = £505 billion) and then transfer A and B into New RBS, the balance of £22 billion is non-repayable share capital in New RBS, which gets given back to Old RBS (so there's no net transfer of value away from actual Old RBS).

3. The non-repayable shares in New RBS and all the other rubbish gets left behind in Old RBS for the shareholders and long-term bondholders* and so on to squabble over. Whether they get back more or less than they expect to get back is a different topic - the total market value of all RBS shares is currently under £20 billion, so shareholders (mainly the government, having invested taxpayers' money) have already pencilled in losses of £37 billion. We could do the same exercise with bonds and we'd find out that they have also pencilled in losses of £50 billion or something, so splitting the bank is not depriving anybody of any money that they haven't lost already.

What's not to like?

* There are grey areas where it's not clear whether something is a deposit or a bond, but hey, lines have to be drawn somewhere. I suppose the acid test is "Would this bond have been included in the government's deposit guarantee scheme?"

Administrative cock-up or tip of iceberg?

UK banks are in a bit of a Prisoners' Dilemma: acting individually, it is in every bank's interest to foreclose on every mortgage loan that looks in the slightest bit risky as soon as possible, because there is an advantage to being the first to bail out. However, this will merely speed up the house price crash. Acting as a cartel therefore, it is in the banks' collective interest to hang on as long as possible.*

Whether RBS NatWest will decide that this is a PR disaster and hastily back track remains to be seen...

The Addymans have been threatened with repossession, even though they've never missed a payment on their mortgage. Peter and Marian Addyman say NatWest gave them a week to repay the £226,000 loan or face losing their home, and the deadline has expired. The ultimatum - for which they say they have been given no explanation - comes despite the bank's nationalised parent company, Royal Bank of Scotland pledging not to carry out any repossessions for six months...

Mr Addyman, a 32-year-old pharmacist, and his wife, who works for a mental health unit, have three sons. They bought their newly-built five-bedroom home in St Leonards-on-Sea, East Sussex, for £250,000 in 2004. About two years ago they consolidated their debts by taking out a second mortgage for £100,000 with a finance company, but insist they were entirely open with NatWest about this.

... NatWest wrote to them in September to say that after 'reviewing' their arrangement it was withdrawing the mortgage. They had 30 days in which to secure a new loan or it would begin recovery action and inform credit rating agencies of the debt. The letter concluded: 'We assure you that we have only reached this decision after careful consideration. However our decision is final and we are not prepared to enter into any discussion in relation to it.'

The couple tried to make alternative arrangements, but say the fall in property prices has left them unable to find a new mortgage deal.

* All cartels face a similar problem, for example for oil-producers, there is a collective advantage to restricting supply to keep prices up, but an individual advantage to breaching a quota to exploit the artificially high prices.