What happens if one of the banks go bust

Let's assume one of the big two goes belly up and there is no bail out. Immediately that is announced 40% of the money transmission system is defunct, that is 40% of people will have no facility to withdraw from their ATMs, write cheques or use cards. They will also have to open new current accounts and advise their employer to desist immediately from crediting the old one. All those direct debits to utilities etc. will have to be stopped and rearranged. Never mind the economics the very practicalities are unthinkable.

A huge number of people will have their wealth decimated.

Foreigners will lose all faith in Ireland Inc., (read any rating agency, they build in big time that the government will bail out one of the big two, if necessary). Then there is the contagion effect as there would be a run on the other banks and also other banks will have lent to the stricken entity.

I would guess that this would lead quickly to a contraction in the economy of about 50% with unemployment reaching 30% at least, in fact it could trigger a downward spiral into a Zimbabwe style abyss.

If the Government stuck to its principles and let this doomsday scenario unfold when a simple nationalisation would solve the situation, that would forever make it unelectable, as well as being criminally irresponsible. The US, Sweden, Norway, UK have all known when to put pragmatism above principle, I trust our elected leaders to do the same if for no other reason than self preservation. (Boss, I really can't understand how you would recommend this course.)

Now does the same argument apply for a big specialist non retail bank? Not so sure. Does it apply for a small retail bank/building society? Not so sure.

Lads, lets all take a breath for a sec.
We are a long LONG way off a run on any of the bigger irish banks, and even if it were to happen, we'd see it coming like the slow-motion disaster that was Lehman or any of the others that are filling up the column inches (bearing in mind that investment banks are a solar system apart from our own pretty conservative banks). Their only exposure is property, which is unlikely to kill any of them, but will certainly wound all of them (no harm in some blood-letting).

When something we know little about is suddenly thrust into the lime-light in front of our eyes, we tend to make rash decisions. Look at Northern rock. The bank run was a complete waste of time, and now its the safest place to put you money.

So as Jones from Dad's Army would say: "Don't Panic"

We are a long LONG way off a run on any of the bigger irish banks, and even if it were to happen, we'd see it coming like the slow-motion disaster that was Lehman or any of the others that are filling up the column inches

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I am curious as to why you believe we are a long way off either AIB or BoI going bust?
For the last nine months the share prices have been plummeting. What makes them different to the American banks, or Northern rock?

leghorn said:

I am curious as to why you believe we are a long way off either AIB or BoI going bust?
For the last nine months the share prices have been plummeting. What makes them different to the American banks, or Northern rock?

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Exactly. Nothing is far fetched anymore. I was watching Primetime last night when they had the Banks Federation guy on and he was talking about strong capitalisation, good liquidity etc and was accusing David McWilliams of almost treachery for questioning the banking system. I then flicked onto to the BBC to find the British Banks Federation guy saying exactly the same thing as his Irish Counterpart. Of course I come into work today and find that the British Government has 'arranged' for Lloyds to takeover HBOS (well capitalised, plenty of liquidity) because it wasn't going to survive.

Irish Banks are no different to banks in other countries.

paddyd said:

When something we know little about is suddenly thrust into the lime-light in front of our eyes, we tend to make rash decisions. Look at Northern rock. The bank run was a complete waste of time, and now its the safest place to put you money.

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Hindsight is a wonderful thing!

I've just noticed that propertypin.com has banned bank run rumour threads. Mightn't be a bad idea here.

I don't think people looking for clarity on how much savings are secure clarifies as a bank run thread.There have been people on TV/radio and in the print media advising people on the same subject for the last year.The "someone told a friend of mine" posts may be hearsay but if you go by the amount of people discussing spreading your money between accounts on here, it is hardly that wide of the mark.
I certainly was not impressed by the banking federation representative on prime time last night.His " trust me i'm a banker" approach does not wash with people anymore after years of overcharging and assistance in tax evasion.Are the posters who are saying lock the threads really advising that people should not have as much of their money secure as is possible.
For years we have bemoaned that people are to lazy to shop around/change banks/switch motgages, maybe the current crisis will have this effect and hopefully the big banks will have their grip on the market loosened at last.They might then start to appreciate the client base they are left with.

I think its worth saying Rabodirect are safer for people with more than 20 grand on deposit with one bank. Under their deposit protection setup a single customer with a total balance of €40,000 would be reimbursed the full amount of the first €20,000 and 90% of the next €20,000 i.e. €18,000, so that customer will get back a total of €38,000 whereas with an Irish bank they would only get 20K.

We have deleted some posts in this thread which were just pure rumour and written in a deliberate style to encourage panic.

Straightforward questions, answers and analysis will continue to be allowed.

Irresponsible posts and loose talk will be deleted and the posters will be banned.

Brendan

leghorn said:

I am curious as to why you believe we are a long way off either AIB or BoI going bust?
For the last nine months the share prices have been plummeting. What makes them different to the American banks, or Northern rock?

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well, to give a few quick examples, in the US the main banks under sustained pressure are all Investment Banks, and have been deserted by the traders that pumped them with cash for years, only to be replaced by short-sellers that feed on the bad news and drive the prices lower. Eventually no-one will lend them money as there is no confidence.
Investment banks take much much riskier investments that AIB or BOI will or have, ever done.
Leaving the smaller Irish banks aside, AIB and BOI are still very well capitalised, and could be described as 'old-fashioned' in their investments in comparison to modern investment banks.
AIB and BOI have no exposure to Lehamns investments nor the American Sub-prime mortgage products which were sold to (non-irish) banks around the world, and they've all suffered massive losses on the back of it.
Irish banks are still very very profitable even in the current conditions.

In tough times Banks rely on industry confidence; right now the investment banks are bottom of the pile.

As for HBOS they are far too leveraged, mainly in the UK property market and therefore rely on their trading partners for constant cash injection, as opposed to using their own capitcal. Once their partners stopped lending them money they couldn't stagger on for long, as the debt needs constant refinancing. AIB and BOI still maintain their 5-6% tier-1 capital ratios.

Shares tanking does not mean the bank will. Not everyone buys their bank shares for life! Day traders and short-sellers must be having a field-day with the irish banks these days.

I'd love to see the banks dragged to the edge of the cliff, but I don't think they'll ever fall off it.

EDIT: btw don't believe everything you hear from McWilliams or Prime Time. Its their respective jobs to stir it up. Hence we end up with one side saying we're on our way to hell in a handcart, and the other saying 'everything is fine'. Middle of the road is usually correct

Thanks for that Paddyd

As for HBOS they are far too leveraged, mainly in the UK property market and therefore rely on their trading partners for constant cash injection, as opposed to using their own capitcal.

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Are BoI and AIB heavily exposed to property?

paddyd said:

As for HBOS they are far too leveraged, mainly in the UK property market and therefore rely on their trading partners for constant cash injection, as opposed to using their own capitcal. Once their partners stopped lending them money they couldn't stagger on for long, as the debt needs constant refinancing. AIB and BOI still maintain their 5-6% tier-1 capital ratios.

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BOI and AIB are leveraged in the same way to the Irish and UK property markets. HBOS had a Tier 1 ratio of close to if not over 10%. HBOS had access to the BOE and ECB funding. And that still wasn't enough to save them. I am not saying that BOI and AIB are in serious trouble but do not think they are somewhat special compared to their UK counterparts.

I will also point out that this crisis has moved well beyond sub-prime investments, CDO's etc. Not investing heavily in these saved the Irish Banks last year when this all broke. Thats not why they are being hammered.

paddyd said:

Funny that, I see it as 5.7% as I speak, same as it was in Dec 07. they tried a rights issue in June to bump it to 6% and failed.

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It didn't fail, it was underwitten. They raised €4 billion equity in July. I am looking at the latest rating agency reports and updates this month and they all say a Tier 1 of between 8 and 10%

Yet more off topic stuff deleted.

This thread is not about how to make money from the current crisis.

I don't want to close the thread, so please stay on topic.

Brendan

leghorn said:

Thanks for that Paddyd

Are BoI and AIB heavily exposed to property?

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don't quote me on this, I'd have to find a link for you, but I believe they are both in the 35-40% bracket for property exposure, according to their own trade notes int he past month or two.
AIB's total loan book is something like €132bn.
[broken link removed]

HBOS's exposure is actually the same (37%/£40bn), but their clients base were some massive stockmarket-quoted UK builders, with many multi-billion pound deals, which went sour, so there were a number of big-ticket drops. They took equity stakes in a whole host of builders consequently, not just their sites; and the builders share price fell through the floor.
What killed HBOs and the others was the lack of inter bank funding; when confidence in then deminished, they could get loans for less than something like 5 or 10% over the EURIBOR rates, which was always going to be unsustainable, and immediately they needed a merger. Nothing else would save them.

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article4144142.ece

on the face of it, they look quote similar, but risk is a lot less; and should see irish these banks through the next few years.
Remember in this thread we are not talking about how much profit the irish banks will contionue to make (remember they are still very profitable), but how many of then can survive. I believe the main Irish banks will be hit hard; but will survive.
Anglo, for insistance have a loan book of about €70bn, with 90% exposure to commercial property.

Paddyd, the figures you are quoting are for outstanding Construction and Development loans excluding residential mortgages and Buy-to-Let mortgages.

The figures I have (from a Dresdner note quoted by johnboy on thepropertypin):
BoI: C&D 20% Total property exposure: 69%
AIB: C&D 35% Total property exposure: 59%
Anglo: C&D 95%

Edit: On a separate issue, the newsmaking US banks that went bust were indeed investment banks, but Indymac bank which collapsed last month was not. It had 32 bn of assets under management. Its problems stem from residential mortgage losses.

The OP asks "what happens?" not "what are the chances?".

What happens depends on who we are talking about. I have suggested in an earlier post that either of the Big Two would probably be nationalised or else, assisted by guarantees from the Gov, taken over by a foreign bank and (except for shareholders) it would be more or less BAU.

If a lesser retail bank/BS went the Authorities would probably organise a bail out by another bank/banks, again probably no pain for depositors.

If a Big Specialist Bank went bust, Authorities might just let it go under.

So finally to the question what if a bank is actually allowed to go bust?

We would have the usual liquidation process, I presume. The liquidator would try and maximise the assets by selling them off in various bits and pieces and then it would divvy it out to creditors in some legal order. Revenue first. Depositors very high in the list (I think, or would the wholesale funding rank before retail depositors, anybody?) Then down the pecking order.

Worst case the depositors will get Xc in the € returned. And if that is below the 90%/20K the guarantee scheme would top it up.

Am I right in this? Is there another option whereby a receiver nurses the assets along rather than sell them off and pays off creditors on the drip?

One thing is for absolute sure borrowers cannot walk away from their loans just because the bank has gone bust.

Now if one of the big two were allowed to go belly up, well, well, well, that truly that would be economic armageddon. Firstly the money transmission system would be in chaos. There would almost certainly be a run on the other big bank and other banks both by domestic retail depositors but also by foreign wholesale lenders. These banks in turn would collapse like dominoes. The fire sale in properties by liquidators would trigger a 90% fall in property values. The money transmission system would actually cease to function. The economy would shrink initially by 50% before entering a downward spiral. Unemployment would quickly reach 30% and keep rising. The good news would be for those who had squirrelled away assets abroad they would have nice empty roads to drive on.

Harchibald said:

The OP asks "what happens?" not "what are the chances?".

What happens depends on who we are talking about. I have suggested in an earlier post that either of the Big Two would probably be nationalised or else, assisted by guarantees from the Gov, taken over by a foreign bank and (except for shareholders) it would be more or less BAU.

.

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Sorry for this basic question - what is the impact for shareholders if taken over?

PM1234 said:

Sorry for this basic question - what is the impact for shareholders if taken over?

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No straight answer. This is the experience so far:

Northern Rock - Zilch (I think) though maybe some distant hope in the future

Bear Sterns - buttons.

Fannie and Freddie - buttons again

HBOS (not quite the same) - big premium on last quoted share price but this a long way off what it was just a few weeks before.

So, Harchibald, from what I can gauge on your explanation, it is very unlikely that either of the big two would go to the wall, due to the fact that the country would basically self destruct?