Banking Guide Blog

Rock's 'bad bank' earns £350m

Mon, 23 Aug 2010 16:15:32 BST

Northern Rock, the UK bank that famously imploded in 2007, only to be rescued by the government six months later, has posted its figures for the past half-year, revealing a surprising twist in the bank’s fortunes.

Following the nationalisation of Northern Rock in February 2008, the bank was split into two distinct parts – a ‘good’ bank, which contains new savings, and generally operates as a traditional high street bank, and a ‘bad’ bank, which holds all the toxic assets that forced Northern Rock to its collective knees during the credit crunch.

Ironically, Northern Rock’s good bank is performing badly in comparison to its evil twin, posting a £140m pre-tax loss, to the bad bank’s £349m profit. The bad bank, also known as Northern Rock Asset Management, reported a devastating £724m loss last year, which goes some way to demonstrating how quickly the bank – or at least, elements of it – has recovered.

Northern Rock’s efforts to revive its business are being thwarted by its own customers, who continue to withdraw savings from the bank at an alarming rate. Officials predict that £2bn in savings have been liberated from Northern Rock’s vaults in the last six months alone, down from £19.5bn in January 2010, to £17.6bn in August.

Yet Northern Rock chief, Gary Hoffman, claims that the good bank’s flagging fortunes are ‘in line with expectations’. Hoffman noted that the slump in savings was due in part to the government’s withdrawal of a deposit guarantee, which would have protected customers if Northern Rock had collapsed.

Despite the bad bank’s apparent success over its sibling, the branch still owes £22.5bn in loans to the taxpayer. The good bank, on the other hand, is supported by conventional retail avenues, such as loans and mortgages.

Gary Hoffman remains optimistic for the future – “Northern Rock is now able to compete on the same terms as other banks and building societies. The company continues to operate from a position of capital strength and remains committed to returning to private ownership when the time is right."

The recession continues to bite into the bank, however. Northern Rock saw the number of mortgages in arrears jump 273 to 22,837 over the first six months of 2010.

Banking EU stress test

Fri, 13 Aug 2010 14:30:54 BST

Results from the European banking stress tests conducted by The Committee of European Banking Supervisors (CEBS) have revealed that seven out of 91 banks failed.

The banks that failed included five Spanish banks - Diada, Espiga, Banca Civica, Unnim and Cajasur plus Germany's Hypo Real Estate and Greece's ATEbank. But of the four UK banks that were tested, Barclays, HSBC, Lloyd’s TSB and The Royal Bank of Scotland, all passed.

According to the CEBS, the objective of the 2010 exercise was to provide policy information in order to access "the resilience of the EU banking system” in case of “adverse economic developments” and to look at its ability to absorb “shocks on credit and market risk”.

Testing was extended from 26 organisations in 2009, to 91 EU banking institutions in 2010. This was organised in descending order of size, covering “at least 50% of the national banking sector,” the CEBS explained.

The seven banks that failed the health checks would need to raise capital by 3.5bn Euros, in order to meet the required standards. These banks have been requested to put forward a plan to “address the weaknesses” that have been highlighted from the stress testing within an agreed period of time with their supervisors, said the CEBS.

Commenting on the tests, the European Central Bank (ECB), said that the stress testing was "comprehensive and rigorous". It welcomed the disclosures that were made by individual banks. This allowed the 91 banks that were tested the "public assessment of their capital position".

Results of the stress testing were based on “what if” situations, including believable but acute scenarios that were unlikely to occur. However, periodic and EU wide stress tests will continue to be undertaken by the CEBS across the banking sector, in order to improve practices throughout Europe, it said.

The CEBS, EU national supervisory authorities and the ECB worked in conjunction with each other to prepare and publish the results of the tests.

Bank margins currently at record levels

Thu, 05 Aug 2010 13:32:10 BST

The same week that the new Business Secretary, Vince Cable, announced his intention to take on banks in order to create “a more competitive system where the customers are not ripped off”, research has emerged from Moneyfacts.co.uk which shows that bank margins are at record levels.

Recent figures revealed by Moneyfacts.co.uk show that the average rate of interest charged on personal loans is now 12.6%, 12.1% over the Bank of England’s base rate, with credit cards charging an average interest rate of 18.3% above base rate

Despite lenders being forced to try anything they can to cut rates on fixed rate mortgages in an attempt to encourage borrowers to move away from record low variable deals, banks have increased rates on unsecured lending, with lenders taking record margins.

Michelle Slade, spokesperson for Moneyfacts.co.uk, has suggested that “customers successfully applying for unsecured credit are paying a heavy price as the increased risk is passed on through increased margins”. Slade continued to state that “until banks and building societies repair their balance sheets, it's highly likely these increased margins are here to stay”.

As banks continue to pay out bonuses to staff, it appears that customers are once again bearing the brunt of costs. The research by Moneyfacts.co.uk suggests that unless the current government is able to force banks to change their practices, something that Mr Cable has identified as a key test for the coalition, customers will continue to ‘ripped off’ by banks using them to pay for their mistakes.

Bankrupts not being allowed to open accounts

Wed, 28 Jul 2010 12:37:18 BST

Citizens Advice has revealed that people who are in the process of going through bankruptcy are being denied the right to open a basic bank account.

The organisation looked at 17 banks in total, and discovered that only two out of the lot provided bankrupts with basic accounts. A basic account does not provide the user with access to credit or a cheque book, but allows funds to be paid into the account by direct debit, such as income and benefits.

This can have serious consequences because if people cannot get access to an account then they are more likely to carry cash with them, they are unable to take advantage of direct debit discounts and some people may even end up losing their jobs because they have nowhere to receive their wages.

Citizens Advice said that there is no legal reason why people should be denied a basic bank account because they have been declared bankrupt.

Gillian Guy, the chief executive of Citizens Advice, said that “great progress has been made in improving access to bank accounts for many groups who were previously financially excluded”, but lamented the fact that there are still groups who are unable to open accounts.

The only two banks to offer basic bank accounts were Barclays and the Co-operative. Other banks including HSBC, Santander, Nationwide and RBS do not provide the service.

Banks claim that their decision not to allow bankrupts to open a basic account is mainly due to risk issues involved. The BBC quoted a spokesman for the BBA (British Bankers' Association) explaining that it is a commercial decision by each bank as to what they decide to do.

Interest rates not set to rise yet

Fri, 23 Jul 2010 15:40:42 BST

It looks like interest rates are not set to rise for a while yet after the latest member to join the Bank of England’s MPC (Monetary Policy Committee), David Miles, announced that, according to his judgement, it was still too early to consider putting interest rates up.

The MPC is responsible for setting interest rates, and Miles joined just over a year ago. He confirmed that there are still problems in the banking system, suggesting that this means economic growth in the country could still weaken.

He said that he looked forward to the day “when it will be appropriate to tighten monetary policy,” as this would mean a return to “more normal levels of interest rates” and “would be a welcome sign that economic conditions were also more normal”.

However, he confirmed that he believed we were not at that point yet.

He is not alone in his views about keeping interest rates at the record low of 0.5%, a level it has been held at since March 2009. Another MPC member, Adam Posen, has also suggested that an interest rise could risk a return to recession for the country at this stage.

However, one member disagrees with the other MPC members. The only member to suggest a rise was Andrew Sentence. His decision to vote for a rise was based on the fact that inflation currently stands at 3.2%, which is above the target of 2%.

David Miles’s comments were made in a speech to the Bristol Business Forum, and in a nutshell mean that the country has a bit of a way to go before things really start to look better.

£5-only cash machines introduced

Fri, 16 Jul 2010 16:31:46 BST

21 new ATMs have just been launched across the country that will only give out £5 notes, whatever amount is being withdrawn.

The argument for the introduction of the cash machines is a serious one. There is evidence that easier access to cash, especially smaller denominations, helps people to budget better.

With smaller denominations, people won’t be forced to take out more than they need, meaning they will have less money on them and therefore less temptation to spend it.

The 21 ATMs launched on June 28 at locations around the UK, including Paddock Wood, Manchester, Cardiff, Penzance, Oakham, Oxford, Newton Abbott, Portsmouth and more.

Their introduction follows on from two years of trials carried out at Waterloo Station in London.

The ATMs will also help to get more £5 notes into circulation, something which the Bank of England is keen to see. During the two years of trials, an extra 100,000 notes went into circulation, so that will hopefully be reflected across the country now that the new machines have been introduced.

The Payments Council has said that ATMs giving out smaller denominations are normally found in lower-income areas because people don’t take out so much money in a single extraction as in other areas.

The Bank of England’s chief cashier, Andrew Bailey, said that the Bank “has several projects under way to meet public demand for more £5 notes.”

All of the new ATMs will be free to use and can be found located in Martin McColl newsagents.