A look at the major British banks to see how vulnerable they are

Deutsche Bank has been in the news, with it's share price falling like a stone, because the market believes it is in trouble. For more on the Deutsche Bank problem see this previous article.

bank of england logo source - wikipedia commons

But what about the other banks? Are they in trouble too, due to exposure to Deutsche Bank? Have they learnt nothing from the crash of 2008? Have regulators learnt nothing from that crash? Here is a breakdown of the major British banks:

Barclays Bank

Barclays famously didn't need a bailout in 2008, because they got lucky. RBS had beaten them to the takeover of ABN Amro, which was full of toxic assets (the purchase of which took down RBS). Then the Chancellor of the Exchequer, Alistair Darling, saved Barclays from themselves in mid 2008 by vetoing their takeover of Lehman Brothers, which was also full of toxic assets (those assets were bought by Deutsche Bank after Lehman folded, because Deutsche foolishly thought the market was undervaluing them!!)

The government has been forcing them to raise their equity capital, insisting that equity must be 3% of total assets. Remember that loans are assets to the banks, so to achieve this ratio, they must either shrink their loan book, or tap their shareholders for more equity capital. Barclays has been doing both. The Qataris took a 10% stake in Barclays in 2008, and then Barclays raised a further £5.8 billion in fresh capital in 2013 from the markets.

Other regulators are also having an effect - the Americans require that any subsidiary should be separately capitalised, and that risky loan portfolios should have a higher capital requirement. Barclays has responded by simply shedding their risky loans and shrinking their investment bank. What they refer to as their "non-core assets", which include derivatives, are now worth £46.7 bn, down from £125 bn in 2014. They aim to shrink that by £20 bn by next year, but if there is any exposuse to Deutsche in there, they'll be trying to shed that right now - though the bank's chief financial officer says that most of what remains of their derivative portfolio is "vanilla".

By the end of 2016, Barclays also aims to complete sales of it's credit card business in Spain and Portugal, it's Italian retail banking operations and it's wealth management business in Hong Kong and Singapore - they have buyers already committed and are finalising the legal work. It is also trying to sell it's retail banking business in France and is sounding out private equity firms who may want to purchase them.

The strategy has been clear since the euro-crisis of 2013 - reduce exposure to Europe at all costs. They are so keen about this that at Barclays headquarters in London, staff ring bells every time an item of risk-weighted assets is sold, and the place is a cacophony of bell ringing.

Royal Bank of Scotland

Royal Bank of Scotland famously came to grief when it bought the Dutch Bank ABN Amro at an eye watering price only to discover it was chock full of worthless toxic assets. The Edinburgh based bank had to be nationalised by the UK govt, with the taxpayer taking an 85% stake in the bank, costing £45 bn in taxpayer money (and RBS's liabilities thus were counted in the National Debt, taking debt as a percentage of GDP from 35% in 2008 to 87% now).

Not surprisingly the taxpayers were not amused, and a huge clean up effort got under way. The toxic assets were placed in a "bad bank" to separate them from the core, and a taskforce was assigned to sell those assets. In addition the bank was restructured and streamlined, staff went from 227,000 worldwide to less than 100,000. RBS operated in 55 countries prior to the crisis, but has exited 34 of them, selling their businesses in those countries. Their American operation Citizens bank, had been started in 1988, but the increased regulation by the Americans made it unprofitable. In Oct 2014, RBS listed Citizens on the New York Stock Exchange, selling a 25% stake. And every six months since they have sold tranches of equity, until December 2015 when they sold their last stake.

The taxpayer owned RBS managed to sell ABN Amro (the Dutch bank that had got them into trouble in the first place) to Fortis, a Dutch bank, in 2009. Fortis then collapsed and had to be nationalised by the Dutch government in 2010. That means the good old British taxpayer no longer has responsibility for it.

In 2013, at the height of the eurozone crisis, Chancellor of the Exchequer George Osborne ordered the bank to accelerate the selling of it's toxic assets, which amounted to £46 bn at the time. This was also completed ahead of schedule, with the last of them being sold by the end of 2015.

All that remains to be setttled are the regulatory fines for historical misdemeanors (including the sub-prime mess in the USA prior to 2008). RBS has made provisions for these fines and should be able to meet them without having to tap the taxpayer.

Like Barclays, they too have taken a strategy of reducing their exposure to the world and Europe in particular, and concentrating solely on their retail banking operations in the UK.

Lloyds Banking Group

Lloyds was a stable bank, concentrating mainly on UK business and running a sound operation in 2008. It was safe, it was stable and it was unaffected by the Global Financial Crash because it had steered clear of dodgy investment banking. They were persuaded in 2008 by the Prime Minister Gordon Brown to take over the distressed Halifax Bank of Scotland, which had been bailed out by the taxpayer at a cost of £30 bn (the taxpayer had a 40% stake). In 2009 Lloyds revealed that HBoS had higher bad loans than expected, partly because the economy had deteriorated.

Lloyds shareholders were outraged, and the Lloyds share price plunged 32%. Obviously the takeover of HBoS was a bad deal for Lloyds, but it was a great deal for the British taxpayer. HBoS problems, unlike that of RBS, were domestic - they had lent mortgages too aggressively. Lloyds were well placed to clean up the mess due to their domestic expertise. It began structuring and cut 30,000 jobs.

The UK economy recovered in 2013, and the Lloyd bank share price rose. The British govt started selling it's stake in tranches from 2013 onwards. By October 2015 the public stake was down to 10%.

In 2013 Lloyds sold it's Spanish banking business (which was making losses thanks to the dire Spanish economy). Lloyds no longer has any exposure to Europe.

HSBC

HSBC is a goliath of global banking. Only Citibank is bigger. It mainly deals in the far east (it has started life in Hong Kong when that city was part of the British Empire).

It survived the banking crisis mostly unscathed because it's UK retail banking arm had been prudent and it's Far East banking had been strictly regulated by regulators in Hong Kong, India and Japan (all of which had demanded high equity ratios). It's only problem was it's American arm - in 2002 it had bought Household Financial Corporation which was a sub-prime lender (It got renamed HSBC Finance).

However, because it's other arms were so profitable, they were able to absorb the losses accrued by their US arm. They started selling some of their US assets in 2011 - bank branches, their credit card business and their American insurance arm all went. They still have a wealth and investment banking arm in the USA.

They got into trouble with the Americans for money-laundering in their Mexican arm, and ended up being fined $1.9 bn. They have now gotten very heavy handed with applying money laundering rules world wide, angering some customers (but the top brass probably figure better be safe than sorry).

They also remain the only major UK bank with exposure to Europe via HSBC France and HSBC Malta.

Conclusion

You will have noticed that during the 2013 euro crisis, British banks started to Brexit Europe - RBS was explicitly ordered to by the British govt, the other banks were probably encouraged to behind the scenes. The only bank with exposure is HSBC, but it's wealth in it's Asian arm is so considerable that it can absorb any losses that accrue if the euro crisis kicks off again and Deutsche Bank implodes.

It appears that the UK banks were ahead of the British voters when it came to Brexit.