Credit crisis takes its toll on the banks

24 October 2007
The sub prime mortgage crisis is continuing to wreck havoc on the economy – the effects of the subsequent credit crunch are now being keenly felt by the banks, which are suffering as the events of the summer continue to ripple through international economies.

Things have come to a head this week; with Credit Suisse analyst Jonathan Pierce announcing that the Swiss bank has advised its clients to avoid the UK banking sector altogether, and that they would be cutting predicted earnings for 2008 by approximately 18 per cent.

It is predicted that the banks’ credit product revenues will be hit and could fall by 50 per cent in the latter half of 2007, compared to the first half. Mr Pierce said that while one year of slower loan growth will not have a significant impact, it could compound over time and seriously affect banks’ profits.

Market turbulence and a weakening in the housing market are expected to have an adverse effect on UK bank earnings, according to the credit rating agency, Fitch. It has published a report issuing a warning that “tighter (and more expensive) availability of credit following recent market turmoil will add further pressure in the absence of an interest rate cut.”

In light of the bleak outlook for UK banks, the last week has seen Barclays and RBS securing a $30 billion contingency fund from the US Federal Reserve, in order to borrow from it if their clients need help after being hit by the credit crisis.

Paragon has also fallen into danger, as its shares slipped almost 10 per cent yesterday and there are fears that the mortgage provider could be facing a crisis similar to that of Northern Rock; the situation could get critical for Paragon – if the market has not stabilized by February, when its money is predicted to run out, then it will be forced to either sell up some loan books or close its doors to new business.

In a turn of events, RBS has proposed to bail out Cheyne Finance, an American SIV (Structured Investment Vehicle), which is floundering in the industry most affected by the credit crisis this summer because SIVs invest in a range of asset-backed securities, such as the sub prime mortgage market.

There is a long list of problems currently facing the banks, such as higher wholesale and retail funding costs, a sustained higher interbank rate, falling trading revenues and lower investment gains – the extent of the credit crunch is proving to be even further reaching than experts originally feared.

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