Equities are still down following over night selling sparked by the rejection of the proposed US auto maker bailout. Recent comments by president Bush that he may be willing to use TARP funds to help auto makers has helped lift markets off their lows, but sentiment still remains on the negative side.
In the UK, news of HBOS’s dreadful £8bn write down has hit the general banking sector hard. The write down has wiped out half the £15.5 bn emergency capital raised so far. Calls for a cancellation of the merger between HBOS and Lloyds have been stifled on today’s news. The HBOS share price is down around 17% today, not just because of their recent figures, but because of what today’s announcement means for the coming months and years. Many economists predict that the UK economy won’t recovery untill the back of 2009 at least, which means that lending conditions could get even worse for the UK banks.
Until recently, the ‘independence’ premium hadn’t worked it’s way through in the banking sector. However, there are signs today independence from the UK Treasury could start to become a significant advantage. Today Lloyds, HBOS and RBS are down 17%, 17% and 14% respectively. The remaining two major UK banks not to seek government assistance; Barclays and HSBC are down just 9.5% and 4.3% respectively.
The banks have an almost impossible task of providing shareholder (and taxpayer) value whist at the same time being seen to re-start lending to home owners and small businesses. Northern Rock shows precisely why these two competing aims are difficult to align. Northern Rock’s management team has been hell bent on repaying the governments loan as quickly as possible, and it is making good progress in this regard. The problem is that to do this, it has reversed it’s lending policy and is now lending out less than is being paid in. Faced with crippling repayment charges of 12%, other part nationalised banks such as RBS and Lloyds are facing the same pressures. Ministers are calling for them to lend at near base rate levels when a) their cost of borrowing is much higher than base rate and b) the rising levels of defaults on credit cards and home loans makes lending a more risky proposition.
Today’s write down from HBOS shows exactly why interbank lending remains stubbornly elevated. Banks are unwilling to lend to each other because there is no transparency over who is exactly exposed to what, even now. The massively liquidity injections from the Bank of England may do little more than paint over the cracks unless the root cause of mistrust and non disclosure is addressed.
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