Cost of insuring British bank debt hits credit crunch levels

Data from Markit showed that the cost of insuring against default by Royal Bank of Scotland was higher than at times in 2008

The cost of insuring Royal Bank of Scotland debt against default has risen higher than in the days before Lehman Brothers collapsed in September 2008.

Data from Markit showed that the cost of insuring against default by RBS over five years, as measured by credit default swaps, was higher than at certain times in 2008. Quotes to insure Lloyds Banking Group debt against default were also higher, in moves that one senior analyst described as "irrational" – although he noted that there was a lot of uncertainty about regulatory change in the banking sector. Equivalent insurance for other banks has also risen sharply in the past few days.

Some £45bn of taxpayer funds have been pumped into RBS to keep it afloat since 2008 and the bank has amassed more capital and liquidity. The crucial core tier one ratio was 11.1% at the end of June – well above the regulatory minimum. Lloyds has received some £17bn of taxpayer funds and also has a capital ratio well above minimum requirements and paid back all the funds its received through the special liquidity scheme to demonstrate how it is able to raise funds on the money markets.

Shares in the two banks were among those taking the brunt of anxiety about the global economy and the eurozone debt crisis, even as the FTSE 100 index managed to end a seven-day losing streak to close 95 points higher. RBS fell furthest – by 10% at one point – before ending the day 3.8% lower at 26.2p. That is almost half the 50.2p price at which the taxpayer breaks even. Lloyds, where the taxpayer breaks even at 72.2p, was also sharply lower before closing 2% down at 33.1p.

Barclays, which slumped as low as 155p, ended 2% down at 179p while HSBC, which admitted it was in advanced talks to sell its US credit card arm, slumped to 500p before ending higher at 545p.

On the fourth anniversary of the beginning of the credit crunch, there were also tensions in the money markets with high demand for cash at a scheduled tender by the European Central Bank.

Much watched three-month Libor – the rate at which banks lend to each other – nudged higher to 0.84%. But unlike the period during the crisis that gripped the markets in August 2007, liquidity is still available due to the actions of central banks.

Amid continued anxiety about the eurozone debt crisis and the weakness of the US economy, there was a brief respite for Bank of America, the largest bank in the US, whose shares had plunged 20% on Monday amid fears it would need to raise extra capital. Citigroup, which fell 16% on Monday, was also trading higher.

Based in North Carolina, Bank of America is trying to head off rumours that it will need to take fresh hits from Merrill Lynch and the subprime lender Countrywide, both of which it acquired during the banking crisis. Brian Monynhan, the Bank of America chief executive, is meeting shareholders tomorrow.

Cormac Leech, banks analyst at Canaccord Genuity, said the share price movements in UK banks could be explained by concerns that the eurozone could break up, forcing losses on the bailout banks.

"The UK banks are actually starting to to discount the risk of a eurozone break up," Leech said, even though many analysts believe that politicians will do their utmost to ensure the single currency survives.


Jill Treanor

The GuardianTramp

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