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Top Investors Say UK Banks Are Insolvent

Sunday, 08 February, 2009

The UK’s leading fund managers believe that one or more of the major British banks would prove insolvent if forced to value its assets to market value. While the UK has guaranteed all toxic bank assets, solvency issues remain as the problems in the securitization market continue to unravel. This was underlined last month when analysts working at Royal Bank of Scotland warned the UK’s biggest banks are ‘technically insolvent’ on a marked-to-market basis, an accounting methodology of assigning a value to a position held in a financial instrument based on the market’s valuation of it.

About 60% of managers believe that if these assets were priced to market, more than one UK bank would be insolvent. Only 15% think banks would remain solvent in this scenario, while the remainder is unsure of what impact it would have. River & Mercantile’s Dan Hanbury said he is unsure whether banks would become insolvent as it depends on the levels marked to and what market they are measured against.

However, he admits the lack of clarity on the price of these assets means it is more than likely that a number of banks would prove to be insolvent. He said: ‘The major problem knows what the true clearing price of many assets is. These banks are too geared. All domestic banks are still at risk.’ However, BlackRock’s Philip Brides believes the bad loans on bank balance sheets could cause more solvency problems than the toxic assets, which he feels have been priced fairly to reflect the demise of the securitization market.

Brides said: ‘We are still in a situation where marked-to-market, or implied-models, are pricing in scenarios that are highly improbable. Reflecting assets at these valuations would impair the remaining economic capital of banks. At this stage it’s the scarcely-impaired loans rather than the written-down securities that are the most “troubled” assets.’ UK banks have seen their share prices battered as these worries mount. Royal Bank of Scotland has been the biggest victim. Shares in the bank lost 66% of their value after the group said last month it expected to post a record loss in 2008 after writing off billions in toxic assets.

The UK Government already has about a 70% stake in Royal Bank of Scotland after its initial bailout of the sector back in October and a number of industry commentators believe it must bow to the inevitable and nationalize the bank to ensure the sector avoids further pain and liquidity returns to credit markets. However, this is not the consensus view of the rated managers. Only 8% believe Royal Bank of Scotland should be fully nationalized, while the majority of 70% are against the idea. The remaining 22% are unsure of what the best course of action should be.

Legal & General’s Rod Oscroft, who was not in favor of nationalization, makes the point that while Royal Bank of Scotland is essentially government controlled; it needs to be able to retain debt and ability to rebuild. Another manager, who wished to remain unnamed, says nationalization of the Scottish bank would have severe implications on a number of counts: ‘Nationalizing banks gives the government a bigger headache than it already has and undermines confidence in the validity of a capital structure, thereby making it more difficult to raise money.’

Source: http://www.citywire.co.uk/