Are British banks ready for ‘Grexit’?
- 21 May 2012
"They have thought about their direct exposures to Greece and they have marked them to appropriate levels, their liquidity is strong and they have enough capital to withstand shocks from Greece. If it goes further it's not clear, and that is why we have been encouraging them to raise more capital because nobody knows where it will stop or it won't stop."
Sharlene Goff in the FT agrees that the direct hit to UK banks and other City institutions will not be disastrous in isolation: "British lenders have been rapidly winding down their exposures to Greek debt and increasing their provisions against risky loans. They are left with just over £1bn of the country's government bonds, equivalent to just 0.5 per cent of their high-quality capital and less than 0.1 per cent of UK gross domestic product, according to Capital Economics. UK banks' exposures to Greek banks are even smaller, at about £630m."
The relative resilience of UK banks has been a theme explored by Kevin Murphy, manager of the Schroder Recovery fund:
"RBS has also done more than almost any other bank in the world to strengthen its balance sheet by cutting back its leverage – from a peak of some £2.2 trillion in 2008, total assets have been reduced some 30% to £1.5 trillion. Credit where it is due – chief executive Stephen Hester has so far done a pretty good job.
"One final figure worth noting, which we similarly flagged up for Lloyds, is RBS's exposure to the government and central bank debt of Greece, Ireland, Italy, Portugal and Spain, which is a correspondingly negligible £61m across its core and non-core businesses."
However, there are still a number of commentators who believe that UK banks may not be as secure as these figures suggest. The FT article, for example, says that the UK banks are not completely immune to any contagion that might arise from the Greek crisis. It suggests: "UK banks are highly exposed to their French rivals, for example, which in turn have much greater exposures to Greece." It may be one step removed from the beating heart of the crisis, but it is still vulnerable.
This was certainly the impression given by Robert Chote, chair of the Office for Budget Responsibility, who suggested that a Greek exit from the single currency threatens to plunge Britain into a second recession 'equal in ferocity to the record postwar slump of 2008-09'. He added: "The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that has consequences both for hitting economic activity in the economy, but also its underlying potential."
There are other worries: The UK banks and regulators may have done a lot to shore up their balance sheets, but there may be unintended consequences from this process – notably, there will be those who don't like the new regulation. For example, high street giant HSBC has been threatening to pull out of the UK as a result of its increasingly draconian regulation.
"The planned regulations will force banks to ringfence their high street banks away from investment banks and use their own capital to back the retail banks. Lenders believe this will push up the cost of doing business and make their high street banks less profitable."
It seems that the UK banking sector cannot have it both ways. It cannot have a stable banking system and a cheap banking system. There is a trade-off to be made between stability and the cost of doing business. There is no doubt that as it stands the UK banking system is in reasonable shape, but the impact of the crisis in the Eurozone is impossible to predict.
More on Mindful Money:
To receive our free daily newsletter sign up here.
- Gay couple lose court fight for equal pension rights
- Tesco profits tumble 55%
- Alternative ways to get exposure to Lloyds and other banks
- Cameron promises to turn Generation Rent into Generation Buy with new affordable homes
- Is the UK economy actually starting to overheat? The indicators say yes...
- Two-thirds of investors could be unwittingly supporting unethical industries
- Passives make up 50% of most popular funds last quarter
- Car insurance to cost £50 more this year than last, and will rise again
- 120,000 investors have already registered their interest in Lloyds shares sale, with one broker
- Almost 10% of female home buyers claim they have endured mortgage discrimination