WEALTH MANAGEMENT WEALTH MANAGEMENT
YOU CAN TAKE THAT TO THE BANK
No one could have accurately predicted the amount of turmoil that the recent financial crisis would have on banks across the world.
Many believed that the larger banks were still in a strong position as they had equity in the properties that they had provided mortgages for, or so they thought. In actual fact the financial crisis plunged many of the world’s largest banks into a freefall as they lost out due to inaccurately pricing the risks that are involved in granting mortgage related products. In 2006, when the prices of securities that were linked to the pricing of real estate began to downturn, financial institutions all over the world were instantly in hot water. There were many questions raised about the solvency of most banks and this led to reduced investor confidence which in turn had a devastating effect on global stock markets. This led to the slowing down of most economies as credit was tightened and a great deal of international trade was lost. In order to prevent further economic damage several banks were bailed out by their respective governments.
Winners and losers of 2010
One of the main banks that suffered a great blow during the financial crisis was the Bank of America. Its third quarter net loss registered at $1bn (£650m). In 2009, it was estimated that the Bank of America had actually lost 40% of its value in the market. Countrywide, which is a subsidiary of the Bank of America, was a classic example of using predatory lending - a practice in which lenders offer loans at one rate to borrowers and then hike up the rate on the day of completion. This led to its borrowers not being able to make their repayments on their mortgages and similar products, so when the value of real estate plummeted, Countrywide was left with properties that were worth a fraction of the price they lent out for them.
Several UK banks had similar stories to tell with Northern Rock being the worst affected. Not only did they need financial assistance from the Bank of England in 2007, it was then deemed suitable to be state-owned from 2008.
UBS, a bank that is based in Zurich also suffered during the crisis as it had invested far too heavily in securities. It accepted $8bn (£5.2bn) in bail-out
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Ò CHINESE BANKS HAVE COME OUT OF THE FINANCIAL CRISIS IN A VERY STRONG POSITION, EVEN THOUGH THEY TOO SUFFERED SIGNIFICANT LOSSES DUE TO THE CRISISÓ
funds from the Swiss government; this led to the bank’s market value decreasing by 56%. However, there have been winners during the recession and there are banks all over the world that have continued to do well and have even turned a profit throughout the financial crisis. These are the banks that were prudent about whom they lent their money to and paid close attention to the credit scoring of their lenders.
Chinese banks have come out of the financial crisis in a very strong position, even though they too suffered significant losses due to the crisis. In general they have very strong market-to-book ratios which are a clear indication of their strength within the market. To show just how powerful they are, the ICBC (Industrial and Commercial Bank of China) has opened up one of its branches in New York. Global Finance released a list of top fifty safest banks based on total assets and credit ratings using data from Fitch, Standard and Poor and Moody’s. KfW, Royal Bank of Canada, Westpac, Wells Fargo, US Bancorp, HSBC and Deutsche Bank were among the top fifty.
Pending Risks
Unfortunately the fall-out of overzealous lending on the part of many banks is still with us today. Consumer borrowing is still at an all time high with the average rate of personal debt in relation to personal disposable income in the US going from
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