What happens when the first bank fails?

[seekingbalance]

Surely that is going to happen at some point?

Any signs yet? Especially the new startup alternative banks?

[GoSeigen]

Surely that is going to happen at some point?

Any signs yet? Especially the new startup alternative banks?

Please explain where you get this special insight from.

GS

[monabri]

That's an easy question....what happened last time?

[seekingbalance]

Surely that is going to happen at some point?

Any signs yet? Especially the new startup alternative banks?

Please explain where you get this special insight from.

GS

No insight. Just a question I hoped some with more experience than I might want to pitch in with, and maybe consider in their own outlook, as I see little but talk of buying opportunities on these boards, aside from a few, like me, panicking.

I guess civility and helping others investment concerns is going down with the market.

[GoSeigen]

That's an easy question....what happened last time?

Last time? Last time there was Coronavirus????

Last time, as I recall it, someone came around wailing about how Deutsche Bank was going bust and we were all doomed. Deutsche is still going some three years later and fixing its problems. It hasn't had any sort of bailout or capital raising.

What is the OP suggesting, that 2007 is going to repeat itself? Does he have any idea how much the banks differ now from then? LBG stock is priced to yield 20%pa by my calculations. Other banks similar.

Better would have been to ask "What happens when the first bank stock soars?"


GS

[monabri]

What happened last time is they got bailed out ( the banks). Yes , they have been stress tested to extreme. So I think there will be failures..not from the likes of UK banks.

[johnhemming]

The government have a plan to guarantee 80% of potential covid=19 losses and I think also provide some cheaper finance to provide the loans. Hence the risk is substantially taken by the government.

[tjh290633]

Better would have been to ask "What happens when the first bank stock soars?"

Perhaps the first in recent times was Northern Rock?

TJH

[johnhemming]

https://www.ft.com/content/d33c747e-63c ... 4680ea68b5

The central bank also substantially increased the buffers available to commercial banks for lending, offering them cheap funding tied to loans to small businesses while warning them not to devote any of the new resources towards bonuses or paying dividends. (11th March 2020)

In the end if the banks are underwritten against losses from Covid-19 I am quite happy that none of those resources are used to pay dividends as the banks can pay dividends from the profits they make from the rest of their business.

[ursaminortaur]

What happened last time is they got bailed out ( the banks). Yes , they have been stress tested to extreme. So I think there will be failures..not from the likes of UK banks.

In the financial crisis some banks were deemed too big to fail and instead the government took stakes in them which although diluting ordinary share holders largely left preference share and bond holders safe. That won't happen next time as the laws on bank administration were changed in both the UK and EU so that the situation would be able to be resolved without nationalising the bank or letting it fail.

Next time around these "too big to fail" banks would remain open but have their share ownership changed with all share holders in the failing bank losing their shares (ords and prefs) and debt/bond holders having their bonds converted into equity thus recapitalising the bank.

https://www.bankofengland.co.uk/financial-stability/resolution

In 2008, banks in many countries were in financial distress. Governments – including the UK’s – felt they had no choice but to bail the banks out. If a large bank had failed then, it would have caused serious problems for many people, businesses and public services. These banks were ‘too big to fail’.

After the financial crisis, the UK, like many other countries, took action so there would be better options if a large bank were to fail in future. The UK established a framework for resolution (known as the ‘resolution regime’) in the Banking Act 2009.
.
.
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We develop a resolution plan for each UK bank, building society, and certain investment firms. Each plan sets out the actions we would take if a firm failed. We have resolution plans for around 400 firms. For the large majority of these firms, the plan is to permit it to enter insolvency and rely on FSCS protection.

We review these plans every year and update them if necessary.

We identify the preferred resolution strategy for each firm. That depends on things like how much harm its failure would cause to the wider economy and what kind of structure it has.

The three main strategies are:

Bail-in
This is our preferred strategy for the largest firms that provide vital services to the UK economy.
The firm’s equity is written off, and debts written down, to absorb losses. Then it is recapitalised – the debtholders whose debt was written down are issued equity and become the new shareholders. In the medium-term, it would be restructured to address the causes of failure and restore market confidence.
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[GoSeigen]

What happened last time is they got bailed out ( the banks). Yes , they have been stress tested to extreme. So I think there will be failures..not from the likes of UK banks.

That was not the last time. That was about ten times ago. Just before the banks failed people who knew nothing about banks did not come along and say "what is going to happen when the first bank goes bust?" They were saying "The best way to invest is to buy bank shares and let the divis roll in and reinvest them in banks."

Since then, every time someone [Rude adjective deleted.] sees their portfolio level drop worryingly they come here and say "What happens when XXX bank fails?" nod nod wink wink, possibly even short bank shares. It's kind of boring now which is maybe why it's triggered my sarcastic response. For all I know the OP is the same poster who predicted Deutsche's demise a couple of years back.

Now if they presented some well-argued justification [Rude part deleted.] then that would be informative for us. I asked the OP to share his reasoning but as you see from the response there was no reasoning whatsoever, "just a question". [Rude sentence deleted.]

There ends the rant.


GS
[Unnecessary PS removed. Please report posts you feel are off-topic']

Moderator Message:
This post contained several rude and unnecessarily hostile comments, which have been deleted. Please remain civil when using this forum. If you feel a post is against the rules then simply report it. - Chris

[Bubblesofearth]

[Deleted from cited post.]

On the news last night the treasury chap was asked how businesses would be helped that were at risk of insolvency and how offering further loans to such firms was inappropriate and could even make directors personally liable. There are laws around even technically insolvent businesses borrowing more money.

There was no answer other than the same mantra of ' we are looking at options, doing what we can etc'.

If this crisis lasts as long as health professionals think then as things stand there will be mass insolvency. As a small example I was chatting to the secretary of my golf club yesterday and he basically said the club would likely have to close next year because of loss of visitor income. Taking on further debt was not an option.

If this happens the knock-on effects will lead to depression and the banks will fail (or be bailed out again). Their balance sheets have been shored up but not to the point where they can weather the kind of asset falls that would ensue.

Anyone buying bank shares just now is betting on intervention that has not yet been announced.

All IMHO of course.

BoE

[seekingbalance]

What happened last time is they got bailed out ( the banks). Yes , they have been stress tested to extreme. So I think there will be failures..not from the likes of UK banks.

That was not the last time. That was about ten times ago. Just before the banks failed people who knew nothing about banks did not come along and say "what is going to happen when the first bank goes bust?" They were saying "The best way to invest is to buy bank shares and let the divis roll in and reinvest them in banks."

Since then, every time someone [Deleted from cited post.] sees their portfolio level drop worryingly they come here and say "What happens when XXX bank fails?" nod nod wink wink, possibly even short bank shares. It's kind of boring now which is maybe why it's triggered my sarcastic response. For all I know the OP is the same poster who predicted Deutsche's demise a couple of years back.

Now if they presented some well-argued justification [Deleted from cited post.] then that would be informative for us. I asked the OP to share his reasoning but as you see from the response there was no reasoning whatsoever, "just a question". [Deleted from cited post.]

There ends the rant.


GS
[Deleted from cited post.]

Boy, you are so smart. And to think I always respected and looked out for your posts.

I am by no means a newbie, but asked a genuine, no ulterior motive question about what might happen if a bank failed right now.

And can I get this right, these boards are not for people to ask questions about investing? Okay, got it.

Why do you have to be so smug and nasty?

(Sorry, that was a question)

[dspp]

Moderator Message:
Please can you all keep the tone polite, civil, and gentle. There are a range of levels of knowledge, experience, and insight in our community. I have not edited any of the posts as they do all contain truths, but I would rather see gentler behaviour here*.

AND PLEASE, NO COMMENTARY ABOUT THIS. Just move along, be gentle.

Thank you, dspp

(* go to PD if you wish to engage in edgier discourse, but still polite.)

[MaxCashflow]

If this crisis lasts as long as health professionals think then as things stand there will be mass insolvency. As a small example I was chatting to the secretary of my golf club yesterday and he basically said the club would likely have to close next year because of loss of visitor income. Taking on further debt was not an option.

If this happens the knock-on effects will lead to depression and the banks will fail (or be bailed out again). Their balance sheets have been shored up but not to the point where they can weather the kind of asset falls that would ensue.

I agree. A crisis of 12 months (best case to vaccine, according to chief scientific adviser) with intermittent lockdowns 2/3 of the time (as modelled by Imperial) is going to see a lot of small businesses go under, and large businesses reduce headcount. There are then two scenarios:

1) The newly unemployed lose their income, and then their houses, all the houses foreclosing causes a house price crash and stress on banks.

2) The newly unemployed get indefinite UBI/other govt support which covers some of their mortgage payments. The UBI is funded by printing money or issuing substantial new govt bonds, which causes a selloff in GBP and bank stress.

Additionally, in these scenarios I can see mass defaults on personal and corporate loans which causes bank stress.

Any bank stress is going to burn equity holders.

With LBG yielding 10% this is not an outlying view.

Disclaimer: I've not been a bank equity holder, and reduced my long-term holding in BOI 13.375% by half at the start of this week.

[Lanark]

Another aspect to consider is that UK banks have a very high level of lending to other countries.

https://www.ippr.org/blog/is-the-uk-s-o ... r-worth-it

So could a global meltdown cause defaults larger than the UK govt is capable of bailing out?

Is this why the pound is falling much harder than any other currency?

[johnhemming]

I don't see any useful information in that article.

I personally make a distinction between banks. HSBC I see as an international bank based in the UK which has a lot of involvement abroad. Lloyds I see particularly as a UK bank. There probably are some stats somewhere as to what proportion of business is domestic.

Doing a bit of research I note that there is a statutory instrument The Capital Requirements (Country by Country Regulations) 2013 which gives an indication of the proportion of international business. I don't remember this particular committee (I sat on a lot of SI committees), but not all SI's have committees (most don't).

I have found HSBC's report for 2018
https://www.hsbc.com/-/files/hsbc/inves ... n-2018.pdf

That has HSBC about 40% UK by revenue.

Lloyds
https://www.lloydsbankinggroup.com/glob ... osures.pdf

Is about 97% UK

Barclays
https://home.barclays/content/dam/home- ... t-2018.pdf

Is about 57% UK with about a third in the USA.

RBS
https://www.rbs.com/content/dam/rbs_com ... report.pdf

Is about 90% UK

Santander (BNC) of course is a Spanish bank with a lot of South American business which has a UK listing.

Secure Trust (which was the first bank offering internet services in 1995 in the world - a day in front of Wells Fargo)
https://www.securetrustbank.com/images/ ... pdated.pdf

Is 100% UK

Standard Chartered
https://av.sc.com/corp-en/content/docs/ ... ations.pdf

Is about 15% UK.

This has been useful for me as I thought Barclays was more domestically focussed. I have noted insiders buying Barclays and Lloyds during this period. Lloyds was hit hardest by PPI, but I think the forecast PE of 5.1 is takes the PPI costs out of it now. Barclays forecast PE of 3.8 is probably also not including any PPI. (TTM or trailing figures would probably not be adjusted for that). Although looking at the figures on Stockopedia for them it is not quite clear how PPI has been analysed.

[GoSeigen]

Disclaimer: I've not been a bank equity holder, and reduced my long-term holding in BOI 13.375% by half at the start of this week.

Long time, no see. Welcome back!

GS

[MaxCashflow]

Long time, no see. Welcome back!

Thanks! Nice to see you are still here

[dealtn]

Another aspect to consider is that UK banks have a very high level of lending to other countries.

https://www.ippr.org/blog/is-the-uk-s-o ... r-worth-it

So could a global meltdown cause defaults larger than the UK govt is capable of bailing out?

Is this why the pound is falling much harder than any other currency?

The article is quite poor in my opinion.

You need to understand what interbank lending is, what it is for, and why the UK (the City) is the home for it. Yes there is large contagion risk, but it is short dated mainly and well analysed, and ultimately essentially (mostly) sovereign risk and backed by Central Bank activity. The "resource" dedicated to it as the article claims, is disproportionate to the Balance Sheet measurement.

The article doesn't make this at all clear. Losses in previous recessions won't reflect the balance sheet, and past losses in interbank lending would be trivial compared to actual losses, mainly felt in the corporate and retail sectors of banking.