The worst is yet to come for banks affected by the credit crunch

06 November 2007
A growing number of banks are announcing huge losses as a result of the sub prime crisis in America which has led to a credit crisis of global proportions and caused the Dow Jones to drop nearly 400 points.

The Chancellor Alistair Darling has predicted that yet more banks could be affected by the encroaching crisis, and has urged them to offer more clarity regarding the risks they take by investing in bad credit mortgages – the effects of which stand to have a negative impact upon household finances and the UK economy.

Mr Darling has emphasised that the UK will pull through the crisis relatively unscathed, but Telegraph commentator Damien Reece isn’t so sure,“insisting everything’s going to be fine simply won’t convince an electorate that has had a ringside seat at the Northern Rock crisis,” he said.

It is expected that banks will now take action to limit future risk and losses by tightening their lending criteria and being more transparent so that financial monitoring agencies such as the Financial Services Authority (FSA) can detect when they are in dire straits and step in to prevent similar crises.

It is too late for some, however, as Chuck Prince, chief executive of Citigroup (the world’s largest bank) found when he resigned on Sunday after admitting that the bank is facing losses of £4-£5 billion as a result of the sub prime meltdown. The crisis also claimed Matt Ridley, chairman of Northern Rock which thus far is the British bank hardest hit by the credit crunch.

Indeed, considerable damage has already been done to both careers and profits, as fears emerge about more banks being affected by the current situation – shares are down for major banks such as HSBC, Barclays and Alliance & Leicester amid rumours that they are all on the verge of asking the Bank of England for contingency loans. Barclays, the Royal Bank of Scotland and HSBC are all vulnerable to the investments they hold in US mortgage businesses.

Mr Reece also noted that the crisis has revealed not that banks have got it wrong in marginal, obscure derivatives trades, but that “they have got it wrong in the core of their businesses.”

In order to protect the economy from further crises of this ilk, the Chancellor is endorsing an idea that will see a reformed International Monetary Fund become a global financial watchdog, monitoring global markets and lending. This would make it easier to track debt once it was bundled up and sold internationally, which has contributed to sub prime losses of £48 billion.

© Fair Investment Company Ltd