Banking Sector Face Further Problems

The UK banking sector is facing further problems with a number of major banks recently having their credit ratings downgraded. Credit Unions will be monitoring the position closely with banks being competitors as well as holding a large proportion of Credit Union funds.

Following a review of the capital position of the country’s eight largest banks and building societies, the PRA has told these organisations to raise a further £13.4bn on top of the £13.7bn they already planned to raise.

The Chancellor also announced he may hive off RBS’s “toxic” loans into a “bad bank”. The bank has recently had its credit rating downgraded.

As reported last month on our Twitter feed, rating agency Moodys downgraded the Co-operative Bank six points, now classifying its debt as “junk”. Co-operative Chief executive, Barry Tootells, resigned soon after the announcement. The bank is facing problems with its problem loan ratio increasing from 8.1% in 2011 to 10.9% in 2012. The bank has since stopped new corporate lending and appointed a new Chief Executive. The Bank requires to raise a further £1.5bn and is planning on listing its share on the stock market for the first time.

The Co-operative Bank’s problems highlight a number of important lessons. Many of the problem loans are believed to be due to a small number of large commercial loans.  Any lender needs to fully consider and evaluate the risks from commercial lending and from concentrating on very large loans. Lastly, many of the Co-operative’s problems stem from the acquisition of Britannia building society showing the importance of due diligence and proper risk evaluation in any merger/takeover.

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