Posted on 10/25/2007 12:43:56 AM PDT by TigerLikesRooster
UK financial system at risk from new shocks, says Bank
Gabriel Rozenberg and Christine Seib
Britain’s financial system is vulnerable to new shocks in the wake of its most severe challenge for decades, and banks and authorities must learn the lessons of the crisis, the Bank of England says today.
In its first detailed analysis of the squeeze that has engulfed credit markets since the summer, the Bank says that financial institutions have become more fragile and that the availability of credit may tighten. In turn, it sounds a warning that tighter lending conditions could spell serious fallout for the economy, with sub-prime borrowers and highly-leveraged companies particularly exposed.
The Bank’s unexpectedly gloomy report goes on to warn investors that share prices in Britain and the US could prove “vulnerable to any further revision in growth prospects”. A further danger is that the dollar could fall sharply if adverse sentiment towards US securities persists, it says.
Sir John Gieve, the Bank Deputy Governor, admitted that although it had expected some of the problems, “the speed and ferocity” of the global disruptions “had not been anticipated by firms or authorities”.
The Bank’s half-yearly Financial Stability Review, published today, says that the turmoil “has proved to be the most severe challenge to the UK financial system for several decades” and calls for the UK’s crisis management tools to be strengthened. It says that “serious fragilities” have been exposed within the so-called originate and distribute business model used by many financial firms to parcel up debt.
British banks are especially vulnerable. They face a bill of almost £150 billion, hitting their profitability, if the credit crisis forces them to set aside capital against their exposure to structured investment vehicles (SIVs), leveraged loans and mortgage-backed securities, the Bank says.
The banks have promised liquidity lines worth about £109 billion to their SIVs and other off-balance sheet vehicles. If these provisions have to be drawn down and become an on-balance sheet exposure, the full amount in risk capital could have to be put aside. This could come on top of £15.5 billion for leveraged loan risks that have been kept on the banks’ books, and £22.8 billion against exposure to mortgage-backed securities. The Bank points out that the £109 billion bill alone was equal to 35 per cent of the banks’ on-balance sheet loans to British nonfinancial companies.
If banks now fail to adapt their business models and carry on as before, confidence will return but at the risk of a repeat of the market turbulence “potentially on an even larger scale”, the Bank says. It adds that there is evidence that some banks are already loosening their standards once again.
In a shot across the bows of the private equity industry, the report says firms subject to leveraged buyouts will be particularly sensitive to the rise in the cost of debt. The likelihood of a sharp rise in corporate distress in this area has risen, the Bank says.
The report singles out commercial property as “particularly prone to shocks and to rises in the cost of finance”, noting the high levels of borrowing by the sector.
Ping!
Interesting comments.
A market built on excess credit, with its regulatory regime messed-up by Labour’s (and in particular, then Chancellor, now Prime Minister, Gordon Brown) meddlesome creation of the F.S.A., is hardly the basis for sound growth - rather like the Biblical parable of the foolish man building his house on sand.
I've been recommending the book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.The burden of whose song is that "UK financial system at risk from new shocks, says Bank" is not news. All systems are at risk from new shocks, all the time - and when a particular shock does happen at a particular time it is always a surprise, but we retrospectively rationalize it to ourselves so that retrospectively we see its "inevitability" even though that rationalization does nothing to help us predict the next surprise. All it does is reassure us that we will not be surprised again - but in fact risk and opportunity surprises have always been with us, and always will be with us.
And we are psychologically averse to recognizing the futility of thinking that surprises are unlikely when in fact events which have a large impact and which we do not foresee happen all the time. The book does not appeal to chaos theory for its rationale, but it does fit the "black swan" (unpredictable event, named after the fact that before the discovery of black swans in Australia, "everyone knew" that all swans were white) into the context of chaos theory (and praises Mandelbrot, personally, to the skies).
The author also notes that he found that the military was the best place to look for people who had a healthy respect for the possibility of large surprises. And, tho he does not belabor the point, he states categorically that socialism is markedly inferior to capitalism in that centralized planning is pretty much predicated on the ability of an elite to predict what no one in fact can predict. He translates his black swan theory into practice by putting 80% of his investment into government bonds and the other 20% into black swans - a diversified portfolio of hedges against "improbable" catastrophes and (individually) small speculations on future opportunities.
He is exactly right. This is one reason I have developed "healthy" disdain for so-called intellectuals. They mostly live inside the world of their creation. Everybody tends to do that unless they have to pay for their mistakes with their lives, or are constrained in other ways to confront the reality squarely(such as those in hard sciences or engineering.)
he states categorically that socialism is markedly inferior to capitalism in that centralized planning is pretty much predicated on the ability of an elite to predict what no one in fact can predict.
That is right. There is limit to our ability to predict as chaos theory shows.
All complex systems(including biological systems) have an ability to adapt(or respond) fast to surprises. This is the mechanism which search for the best available under limited information. Chaotic nonlinear system is better at this. It does not always settle fast on old proven solutions. It wobbles around, more receptive to looking for new solution if required.
If one's education is used only to build giant elaborate alternate reality where one can comfortably dwell on, such education can be rather lethal in the end.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
~~Ludwig von Mises
Sounds like a book worth reading, thanks.
Exactly. The socialist is a critic rather than someone who actually gets things done to a bottom line. People such as journalists and teachers/professors and writers feel free to criticize and second guess - but let a socialist get a position of authority, and shazam! When they are in power we are only supposed to judge them by their intentions, and not by their results.he states categorically that socialism is markedly inferior to capitalism in that centralized planning is pretty much predicated on the ability of an elite to predict what no one in fact can predict.
That is right. There is limit to our ability to predict as chaos theory shows.
When I read about chaos theory I knew that it was favorable to "conservatism," as our political philosophy is wrongly called.All complex systems(including biological systems) have an ability to adapt(or respond) fast to surprises. This is the mechanism which search for the best available under limited information. Chaotic nonlinear system is better at this.
Yes. IMHO socialism, and central planning (but I repeat myself), are inferior to capitalism because socialism is, organizationally at least, so much simpler than capitalism. It attempts a frontal lobotomy on society, assaying to eliminate decisions not in harmony with the politically correct conceit that the central planners know all. They do not know everything that is known at various crannies of society at large, and they especially are bad at predicting undesirable effects of their own actions.The Black Swan is an enjoyable book to be read closely, and reread. My broker has promised to read it, and if he does I think the quality of his advice will improve. I intend to buy a copy for my son in law, and one for myself as well.
“he states categorically that socialism is markedly inferior to capitalism”
Thanks for the ping and book recommendation. Speaking of socialism...pick a link...any link that interests you. Scroll down...enjoy.
http://bastiat.org/en/the_law.html
Thanks to FReeper raygun for the link.
Merrill reported a third-quarter net loss following a total of $7.9 billion in writedowns on collateralized debt obligations and subprime mortgages.
Merrill reported a net loss from continuing operations for the third quarter of $2.3 billion, or $2.85 per diluted share - the biggest loss in its 93-year history - significantly below net earnings of $2.22 per diluted share for the second quarter of 2007 and $3.14 for the third quarter of 2006.
More here...
http://www.finfacts.com/irelandbusinessnews/publish/article_1011590.shtml
I noticed the article you mentioned. I guess problems keep coming. I was about to post it, but thought I was posting too much for a single day.:-)
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