Saturday, 19 April 2008

UK banking 'crisis' in perspective

Total UK personal debt (mortgages, credit cards etc) was £1,409 billion at the end of 2007. That's roughly the same as gross domestic product or nearly £60,000 per household. But there can't be a liability without an asset, rather unsurprisingly, total household bank deposits are around £1,000 billion.

The banks only have to worry about those people who can't afford to pay their mortgage and who are in negative equity. Let's assume that house prices fall by one-third to their long term average price/income ratio (reversing the last three or four years of price rises) and that a fairly catastrophic* five per cent of people lose their jobs. There are about eleven million people with outstanding mortgages so let's assume the banks repossess 550,000 homes** and suffer a loss of £50,000 on each one. That'd be a loss of £28 billion, which sounds like a heck of a lot, but it's only 2% of the total money that banks have lent out.

A brief summary of the main UK banks*** is as follows:

There seems to be a heck of a lot of double-counting (total assets over £5,000 billion!), but even assuming that banks have to write off as much as £50 billion and thus have to raise another £50 billion in cash from their own shareholders, via rights issues, like RBS, this is on average only asking shareholders for another £1 for every £5's worth of shares that they currently own.

In RBS's case, it's more like £1 cash for each £3's worth of shares****, but hey, so be it. And that £50 billion is only one-twentieth of all the money that households have on deposit with banks, so all the bank's shareholders are being asked to do is swap a cash deposit for more shares. Which they can then sell in the market and stick the money back in the bank if they want.

* i.e. one-and-a-half million workers. Unless it's those one-and-a-half million superfluous public sector workers, of course.

** There were 190,000 actual repossessions (not just 'repossession orders') in the years 1990 to 1992. This time is going to be a lot worse.

*** Excluding Nationwide (a building society), Abbey (owned by Johnny Foreigner, so who cares) and Northern Rock. Total assets as at 31 December 2007 per published accounts and market capitalisation is as at today's date from the rather excellent Yahoo finance section.

**** The rights issue is supposed to raise £12 billion, against a current market capitalisation (the total value of all shares in issue) of £38 billion.


Anonymous said...

Aren't those capital ratios a little low, going by your 1/8 example a few days ago?

Mark Wadsworth said...

Yes they are - the proper minimum ratio appears to be about 9% or 1/11.

It's not an exact science, but RBS, Barclays and HBOS have very low ratios, which is why their market cap (relative to gross assets) is also very low - the markets seem to have factored in the likelihood of a rights issue and/or expensive and embarrassing government bail-out.