Another credit crunch question.....bank related

I don't think anything can be said to be truly safe, but it would be an incalculable political disaster if a major British high street bank was to collapse, so I suspect the government and Bank of England would do everything it possibly could to prop things up.

For a good example, the US government - traditionally far more right-wing than ours when it comes to economic matters and therefore more inclined to let struggling companies go to the wall - has bailed out Merrill Lynch, a banking firm that has a similar level of importance in the average US main street.

But of course it does rather depend on how expensive the remedy is - governments don't have unlimited supplies of cash. And if the bank was found to have brought its problems on itself (for instance, insanely reckless lending), they might not get much sympathy.

Thanks Mr JK, so it'd be similiar to the Northern Rock thing? They were bailed out, weren't they?

They weren't just bailed out, they were nationalised - but whether it's possible (or politically/economically desirable) to do the same thing again remains to be seen. A bank like Barclays is much, much bigger than Northern Rock!

But, as I said, a major high street bank collapse would be such a cataclysmic disaster that I suspect the government would do literally everything it could to avoid it.

I thought that there were certain protections in place for anyones money upto £30k or so.

Thanks again Mr JK.....I can rest in peace for now then.

Kegsey, I thought that as well, although I thought I'd read somewhere they are trying to change it and make it 50k.

As far as I can gather your money is meant to be protected within UK banks up to the ammount of £35,000, but if several banks went under at one time its possible they could run out of money. Also after the first £2000 have been paid out the rest of your savings are only covered up to 90%. Its rather scary stuff and I don't believe its even really started yet, were not even seeing the fallout from the last few months yet.

This is worrying me too. For all the doom and gloom headlines we've been seeing, the vast majority of people are still ticking along quite nicely. Yes, some will have had to tighten their belts a little, but it is currently only the truly poor / pensioners (and students apparently) that are really feeling the pinch.

However, there is still a long way to go until things get back to equilibrium, and there could well be more redundancies on the horizon. That's when things will get interesting.

There has just been the World's safest banks 'announced' and the only UK bank in the top 10 for that is Lloyds TSB. Will try to find link

L
xx

https://gfmag.com/

this was 2007

P&P I can't see how we are going to get through it without mass redundancies. IMO lost of people still see the news as media scaremongering. I think the really picture is much worse than is being presented by mainstream news provides, particularly the BBC.

https://gfmag.com/

Really random aside but something I've wondered since the Northern Rock situation, what happens to the people who have mortgages with a bank if the bank collapses?

Obviously if there is a rescue from another institution/3rd party the borrowing is simply transferred but what happens if the bank just collapses? Do mortgages become null and void so in effect people suddenly own their house outright?

According to the man on This Morning earlier, the debts just get sold on, so he advised that you would just keep making the payments as normal.

I have been worrying about this too - I am very thick when it comes to economics! I was thinking what happens if the like of the bank you have a loan with for your car or the credit card company you have your card with goes under? Do they demand all monies back immediately!?

I suspect there are various safety clauses in your original agreement to prevent this happening, though you need to be absolutely sure that you're meeting your own obligations regarding paying on time!

Phew that is a relief then! Yep never had a late or missed payment in my life.

No they haven't. Ml has been bought by Bank of America who are themselves a high street bank like Barclays becuase they want to be an investment bank and to build a portfolio like ML have would take 10 years. They have decided to by them to miss this bit out. AIG have been bailed out by the GVT but ML who are not really a 'high street' presence as they are primarily an investment bank with sidearms like Blackrock which deal with very big business private clients will merge with USA biggest high street retail bank and thus will be a huge player on both sides - apparently. My H is ML (So really hope this is the case and nit just some story!!)

Also the reason Lemans is now in the stete it is in is becuase the Fed refused to spend taxpayers money to bail them out - so the same would apply to the other investment banks I assume.

Ok here s the problem the mortgage lenders have. lets say natlloyds banks lend mr smith 95,000 to buy a house on the basis of a 95% mortgage. smith finds the remaining 5 grand. the house goes up to 150 grand, the banks money is super safe, because is smith defaults, the bank takes back the house, sells it for 150 and pockets 55 (ignoring any interest payments etc etc). asuming smith makes his payments, and the houe stays at 150 grand, it means t hat to other banks which might lend to natlloyds are happy to, because they know that natlloyds has a very safe loan with smith. so they lend money to them, which they use to lend to more people to buy houses. housing market goes up, the banks balance sheet goes up, they borrow more money from other banks to lend to other smiths. all good.

then late last year smith defaults on his mortgage. the bank takes ownership and puts it on the market. it doesnt sell. they lower the price to 120. still doesnt sell. the market continues to fall. they lower it to 100, no sale. then the value drops even further to 75,000. now the bank wont go bust because of smith, but when there are lots of smiths its a different story, because...those banks which have lent to natlloyds now think "fuck me natlloyds cant pay US back the 95,000 that THEY lent to smith, so natlloyds balance sheet suddenly looks shaky. rumour goes round the market, natlloyds share price drops and other banks wont deal with them. then its on the news, then joe public panics and withdrawns their savings, which were being used to lend to other smiths. bank collapses.

what happens to all the other smiths who pay on time? nothing. another bank steps in and "buys" the "loan book" from natlloyds, and you keep on paying your mortgage or other loan to the new bank.

the wider issue here is that banks are today scared of lending to one another, which means that they will only lend to smith if smith is percieved as a very good credit risk - ie, he has lots of equity or deposit, and he s a sound bloke. that in turn means that newly married mr and mrs jones cant buy a house, because they only have a 5%, or 10% deposit, so they are forced to rent. so in this scenario, the banks lend less to joe public, less to each other, house prices fall, even less houses are sold, less mortgages taken on because it becomes so hard to get a mortgage.

now when smith buys his house, base rates might be 5%. smith might be paying 5.4% on his mortgage. in times such as these, even though the base rate is not high, the interbank rate (the rate at which banks lend to each other) is much higher, which again puts them off borrowing from each other, and when smith comes to get his morgage, he finds the best rate is 5.99%, or much higher, which in turn puts him off buying - vicious circle for the banks.

when a bank collapses, it shakes the market. theres a confidence loss. when that happens it means that deals are pulled, shelved, whatever. the market falls, which means hte value of of (usual) investments falls. that hurts joe public, and lots of companies. companies lay people off, which means they cant pay their mortgages. natlloyds reposseses but cant sell, blah blah blah

get the idea?

this isnt intended to patronise anyone, its just a really basic explanation of whats going on.

No that's actually really good Nick. Is it always the case that there will be someone i.e. another financial institution that will buy out a struggling bank?

Is it a real possibility that in the current climate there may be a time when a bank will be in difficulty and no-one will step in?

Thankfully we're the Smiths who pay on time ?

no its not always the case. northern rock is a classic example. several organisations (including virgin) put low offers in, and ultimately they were deemed derisory. sadly the govt took too long to act, but actually, my view is that it would have been better for the govt to let northern rock go. it could ultimately cost the british taxpayer billions.

if a shaky bank starts to go (like BCCI did in the early 90's), if the market perceives it as rubbish, they would only look to buy the loans, nothing else. if the loans were deemed to be so low quality that it wasnt worth it, they wouldnt. if that happened, the govt would have to step in. put it this way, no one will ever get a house for free ?

Just to add, confidence is the life blood of any bank - one of the reasons Lehman went in the way it did. Interesting to look at what happens to HBOS. I'm not forecasting the end by any means but it's interesting to note that 3 separate companies I've spoken to in the last week are considering moving their deposits to 'safer' banks. A decision purely based on perception rather than the commercial realities of the situation.

NickJ, thats a really good explanation, thanks.

I'm lucky at the moment in that I'm back living at home and Mum is a good Smith who pays her mortgage but is trying to sell the house.

? indeed! I was just reading this thinking what a love idea - we'd all be in a rush to re-mortgage with DodgyLookingBank plc if that were the case!

Thanks for taking the time to reply Nick. I knew no-one would get a house for free, its just more a musing brought on by the fact that that one of our mortgages is with a very small lender and what any potential repercussions could be. I know that realistically as long we we can keep paying both on time, which isn't a problem we shouldn't really worry

Baron whats the latest on AIG?

On newsnight it was saying that the UK banks such as HBOS etc are now in a much better position than they were a few months ago as they have sold of assets etc so that they have a pool of money so they should be able to weather the storm alot better. I really hope so anyway as our mortgage is with Virgin One which is actually HBOS.

look, will you all please stop worrying about your mortgages, NOTHING is going to happen to them, even if your lender did go bust.

as baron said, HBOS is fine balance sheet wise, but if there is a loss of confidence, it ll be a different story (even if there really is nthoing to wrry about)

Virgin One is RBS, not HBOS. Our mortgage is with them too.

Rumour has it that the Fed might actually bail them out - they need $80bn, not $20bn as reported earlier in the week. So much for moral hazard ?.

80? christ

In which case the New York state authorities are absolute idiots for lending them $20bn on Monday. This also brings into question exactly what AIG were telling them. I think I heard that all the ratings agencies had downgraded AIG as well over the past 24 hours.