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Which Bank Is Safest?

October 5th, 2008 by admin | Filed under Global Credit Crisis, UK Bank Accounts, UK Banks.

Where’s the best place to keep your money as the credit crunch threatens to sink more banks?

The answer is no one really knows but a logical investor would look at the reasons that are causing banks to fail and invest in the one that comes out the best.

The first step is looking at why banks are failing.

Short selling bank shares

Stock Market speculators short selling were high on the list until the US and UK governments banned the strategy.

Short selling involved taking shares on loan for a specified period and paying their market value on the final day of the loan.

In practice, speculators would borrow bank shares, say, worth £10 each and sell them.

Next, somehow rumours about the bank’s ability to trade would start circulating. The rumours pushed the share price down and when the time came round for the speculator to buy the share, the price would have dropped to £3 each.

Gambling on the share price falling in the time the share was held earned the speculator £7 per share.

Subprime lending

Banks don’t lend their own money – they borrow from other banks to lend. Then someone had the idea of using mortgage portfolios as an asset to borrow more money against.

The idea was the more a bank could borrow at a low rate and lend at a high rate, the more profit The trouble came when lending restrictions were relaxed and a lot of the borrowers were not good credit risks.

Banks didn’t know which other banks were exposed to possible losses from subprime lending – that’s lending to people with poor credit ratings – so they just stopped lending to each other altogether.

That’s what caused Northern Rock to fall. Northern Rock was fine when the banking market rolled over their loans every three months, but when they couldn’t renew their borrowing; the bank had insufficient funds to cover their debt.

Safe as houses

Now short selling is out of the picture, a good indicator of which banks and building societies are safe and those that are not is how much they lend per £1 of investment savers have on deposit and who borrows that money.

The highest risks are borrowing by people with poor credit histories, followed by lenders with a high exposure to buy-to-let. The assumption here is these are the banks that will feel the hurt most as poor credit risks and landlords who don’t live in the property they own are more likely to fall in to arrears.

The problem the banks have is that the value of the property their loans are secured against is falling, pushing them towards negative equity.

Saving and lending balances for major banks and building societies

This league table is compiled from the latest company reports, balance sheets and accounts and shows:

  • How much is loaned out
  • How much savings are on deposit
  • How much money is in the bank to cover lending

The more money loaned out exceeds savings deposit, the more at risk the bank faces from the credit crunch:

 

Loans out (£ billions)

Savings in

(£ billions)

Savings cover for loans out
Northern Rock

£96.7

£30.1

£3.21
Standard Life Bank

£10.1

£4.2

£2.40
Halifax Bank of Scotland

£395.2

£227.1

£1.74
Bradford and Bingley

£36.1

£22.2

£1.63
Alliance and Leicester

£46.4

£29.6

£1.57
Abbey

£106.3

£68.0

£1.56
Lloyds TSB

£188.3

£139.3

£1.35
Britannia Building Society

£23.1

£17.1

£1.35
Nationwide

£115.9

£86.8

£1.34
Coventry Building Society

£10.0

£8.2

£1.22
Royal Bank of Scotland

£466.9

£384.2

£1.22
Barclays Bank

£282.3

£256.8

£1.10
Yorkshire Building Society

£113.3

£12.5

£1.06
HSBC

£430.7

£444.9

£0.97

 

Since this table was compiled in July, other banks have swallowed five in the list up – the only survivor is Standard Life Bank.

The lender with the least exposure is HSBC bank, with enough funds on deposit to cover lending.

A betting man would maybe consider Standard Life is sitting out on a limb at lending £2.40 for every £1 on deposit.

Remember – this is not an exhaustive list of banks and the trading figures are historical and subject to change as new financial accounts are released.

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