No end to banking crisis as Bradford and Bingley goes down

Article source: Stephen Womack -

No end to banking crisis as Bradford and Bingley goes down

Another bank rescue sees the Government intervene. Bradford and Bingley has been sold, along with its £20 billion in savings and deposits business and its branch network, to Santander, the giant Spanish banking group that also owns the Abbey. Bradford and Bingley’s other operations including its £50 billion worth of mortgages and loans assets have been nationalised.

This way out will see the cost of the Government’s rescue of Bradford and Bingley shared amongst some of the more stable banks and building societies; the costs are estimated to be between £3 to £5 billion. This figure has been calculated taking into account the lower rate of savings and increased cost of borrowing expected in the coming years; it disregards whether the Bradford and Bingley’s mortgage customers pay up their loans or not.

Bradford and Bingley will however continue trading normally in the mean time and people will run their accounts as before, until Abbey restructures the products and branch network when they assume full responsibility. At the same time all savings and deposits for Bradford and Bingley will now be held under Abbey’s licence with a protection limit for the first £50,000; this means that depositors with savings deposited in the Bradford and Bingley and the Abbey are only protected for a total of £50,000 across both of the banks.

Having acquired 197 branches and 140 agencies from Bradford and Bingley, Abbey is also set to acquire a further 250 branches from Alliance & Leicester bringing it to a total of 1,150. Abbey will however be doing a lot of restructuring with some of these branches being closed down and another 300 coming up in places that were not duly covered by A&L and B&B.

As expected, B & B and its subsidiary Mortgage Express have stopped processing mortgages. Those people who had acquired mortgages from the two companies will however continue with the acquisition process and eventually get the loans but new applicants will have to apply to other institutions for mortgages.

Existing borrowers will keep paying their mortgage loans under the same terms and conditions. However, they will have to contend with higher fixed rates while dealing with the fact that discounted offers are expiring because Bradford and Bingley will no longer be coming up with any more such deals.

Many borrowers are feeling the pinch with monthly interest rates rising and dealing with the difficulty of finding new lenders as most of them have come up with stricter conditions with the good deals going to those who have from 25% upwards equity in their homes. This crisis has made borrowers more aware of the risks involved in the mortgage market as mortgage experts agree.

Shareholders are crying foul as well with the shares falling sharply from 536p to a disappointing 20p at the time Bradford & Bingley ran into trouble. For this issue the Government will appoint a valuation expert to come up with a compensation plan for the shareholders; a move that will take months to get completed and may be likely to a very poor valuation of the business.

B & B also issued permanent interest bearing shares (Pibs) that paid a fixed interest in perpetuity and have now been turned into subordinate bonds, still with a fixed interest. These bond holders will lose out greatly due to the nationalisation of Bradford and Bingley’s mortgage book.

When it comes to the naming of the two newly acquired investments; Alliance & Leicester and Bradford & Bingley by Santander, it is still too early to tell whether these names will be retained. Santander has however pointed out that it will retain the three namely Abbey, A & L and B & B as distinct brand names for now.