View more on these topics

Bad bank will save struggling UK banks, say experts

The creation of a UK ‘bad bank’ will be the best way to save troubled UK banks, according to asset experts.

The Government launched its five point plan last month to save the UK banking sector, including an asset buy up scheme and an asset guarantee scheme. But sources say this is a “halfway house” and the only way to save the banks is to remove the bad assets completely, putting them into a ‘bad bank’.

Odey Asset Management banking analyst Ben Lambert told the Financial Times: “It is quite clear that the government’s priority right now is not to nationalise the banks.” He told the FT that the “bad bank” scheme proposed in the US to bail out the banks proves that there is an alternative to state control. “Our numbers show that an asset-guarantee scheme can work,” he said to the FT.

Exact Mortgages managing director Alan Cleary agrees. He says: “Politically this is a big decision, but there are only two eventual outcomes; either create a bad bank and take these toxic assets off the balance sheets or nationalise the struggling banks.”

Cleary says mathematically a bad bank is the most prudent choice. He surmises that of the £1.2 trillion UK mortgage book, a very worst case scenario would be that 30 per cent were ‘toxic’, meaning £350bn would need to be bought. He then calculates that even if there were only returns of 50 per cent, this would cost the Government £150bn.

“But that’s an highly irrational calculation,” says Cleary, “realistically only between 5 per cent and 10 per cent of all UK mortgages could be ‘toxic’ and then of them, you could expect losses of 20 per cent. That means if the Government were to buy up the toxic assets, they would stand to lose maybe £15bn, which is small in the context of the recent financial packages.”

Cleary says this could actually be beneficial to taxpayers: “If these ‘toxic’ assets were held long-term they would give a rate of return,” he says. “As soon as house prices begin to bottom, and they will, the assets could rise in value by as much as 50 per cent.

“This has to happen, the plans so far are just a halfway house. We are at Defcom 4 now; whether the Government takes its time and the banks suffer more damage or its acts now, a bad bank will be a reality.”


Questions and answers

Understanding people is all about trying to view matters from their perspective. This allows us to find out what really motivates them.

No keyman is an island

Last week, I looked at the importance of owner/managed businesses having sufficient life and critical-illness cover to provide liquidity either to maintain loan repayments or to clear outstanding debts in the event of the death or critical illness of a key contributor to income and profit.

Fair Exchange

In 35 years in the City, I have been blessed by opportunity, wonderful mentors and friends – and being in the right place at the right time.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm