Banks continue to take knocks from the credit crisis

13 November 2007
British banks are being forced to realise the potential damage that the credit crunch could cause, as HSBC announces another $1 billion loss as a result of its involvement with the American mortgage market, despite hopes that the bank had already weathered the worst of the sub prime storm.

Deutsche Bank said yesterday that the sub prime crash will cause total global losses of £194 billion, which could prove to be true if HSBC’s experience is any indication. Barclays and the Royal Bank of Scotland have also experienced significant hits to their shares, and Friday saw trading on Barclays’ shares temporarily suspended because of the high number of investors trying to sell them.

Analysts fear that the fallout from the credit crunch could reign over Britain’s banks for the next two years, until the full impact is known of the toxic sub prime packages that were sold throughout the global economy and are now threatening its stability.

The credit crisis has also claimed other casualties, such as Merrill Lynch – the world’s biggest brokerage – which wrote off $7.9 billion, and RV Capital which ran into severe liquidity issues in August and announced that it was going into administration, citing losses of more than £10 million.

Blackstone – a private equity giant and one of Northern Rock’s advisors – has experienced a 44 per cent decline in its property division and has announced third quarter losses of £54.9 million as the effects of the American sub prime situation, which has resulted in thousands of repossessions, has spread to commercial property and is hitting the firm’s investment gains. Blackstone’s shares fell by more than $2 as a result.

Mortgage interest rates are falling foul to the crisis, the property market is said to be slowing, and some credit card providers, such as Morgan Stanley, are cutting customers’ credit limits.

In order to prevent future credit crises, the International Monetary Fund said yesterday that banks should be required to offer more clarity regarding their exposure to the sub prime market. At its inaugural Regional Economic Outlook in London yesterday, the IMF was sure that the European economy is sufficiently resilient to withstand the turbulence of the financial markets, but urged caution as financial institutions take measures to improve risk assessment to prevent impeding innovation and the hindrance of development.

Mr. Michael Deppler, Director of the IMF's European Department, emphasised the report’s main findings: “The ongoing financial turbulence has underscored the need for financial sector reform. It revealed that private and public prudential frameworks will need to do a better job at keeping up with financial innovation. Clearly, the tendency of new financial products to exploit gaps in prudential frameworks can prove problematic and must be guarded against. Nonetheless, financial innovation has been and will remain an important source of strengthened economic performance over the medium term. This calls for a two-pronged policy response policy to permit Europe to reap the benefits from financial innovation without incurring excessive risks.”

© Fair Investment Company Ltd