UK high street banks own £95bn assets that could qualify for US financial package

Article source: Miles Costello -

UK high street banks own £95bn assets that could qualify for US financial package

Five leading UK high street banks; HSBC, Barclays, Royal Bank of Scotland (RBS), HBOS (Halifax Bank of Scotland) and Lloyds TSB own over £95 billion worth of bad mortgage assets which could be passed on to the US Central Bank under the proposed $700 billion deal.

Under the proposed deal, banks with significant operations in the US can qualify for assistance. Under the terms of the deal, UK banks will be able to use the facility. If our UK high street banks are able to tap into the fund to its maximum potential, then, they could walk away with over one quarter of the total rescue package. As the US Senate neared completion on the proposed deal, it has become clear that the following 5 banks can benefit by the following amounts.

  1. 1. HSBC – £45 billion
  2. 2. Barclays - £17.4 billion
  3. 3. Royal Bank of Scotland (RBS) – £16.2 billion
  4. 4. HBOS – £13.3 billion
  5. 5. Lloyds TSB – £3.4 billion

These estimates above are based on the individual banks structured mortgage debt’ and are based on the individual bank’s exposure to the sub-prime mortgage market and the much less riskier A rated mortgage securities; the estimates also took into account the collateralised debt obligations, commercial backed mortgage securities, monoline insurance, as well as leveraged finance.

The fact that a US senate approved rescue package may help to revive the UK banking system is unlikely to go down well with the American tax payers; however, this move by the American Senate highlights the fact that this is a global issue and what is needed is a rescue package which will help the world wide economy.

As a unit, the five UK high street banks, HSBC, Barclays, Royal Bank of Scotland (RBS), Halifax Bank of Scotland (HBOS) and Lloyds TSB hold combined securities worth $175 billion. Under the proposed deal they could exchange these securities; this would in turn give them some much needed liquidity and significantly reduce the bad asset burden on their respective balance sheets.

The US financial package, commonly referred to as the Troubled Asset Relief Programme or TARP, was presented last week, by US Treasury Secretary Paulson and Chairman of the Federal Reserve, Ben Bernanke. It is hoped, that this eagerly awaited package will bring some much need relief to, liquidity into, and confidence back in to the financial markets.

One high street banker questioned what benefit the US financial package would actually bring. With many banks having already written down their mortgage backed securities, is the US Treasury likely to pay their current value? Wouldn’t the banks be better off holding on to the securities and waiting for the markets to recover?

The other question should be: What are the qualifying requirements for assistance under the US financial package, apart from having a significant presence in the US?

Problems with the inter bank lending rates continue to exist in all the major currencies, with the 3 month rate being significantly higher than the over night rate. The increased cost of borrowing for banks is having a severe knock on effect on the rate at which they lend to their customers.

As the deal in the US Senate is being proposed, both Republican and Democratic Senators have pledged to pass the deal through as soon as possible; however there are many questions which are still to be left unanswered including:

  1. 1. Will the deal allow judges to force banks to cut lending rates?
  2. 2. Will the treasury have the right to veto a pay deal for a bank executive working outside the US?