The UK's banks are beginning to be hit by a liquidity crisis. They won't lend to each other because they don't know what debt the others have on each other's balance sheets.
That's not surprising. Look at this list of deals done by offshore lawyers Ogier.
Take one of them - Grampian Funding Limited, whose sponsors they care not to name. Actually, it's HBOS. There is no Grampian Funding Limited in the UK or Guernsey. But there is in Jersey. You can be pretty sure that's the one. Ogier are pretty big in the Jersey legal market.
How much is involved? EUR40,000,000,000. That's £28 billion, near enough. A figure just a little less than the UK spends on public order and safety a year.
Now of course the money isn't really in this company - it's just a conduit, but these things sure cause stress for banks. Take this press release via Reuters about this particular 'conduit', issued two days ago:
British bank HBOS (HBOS.L: Quote, Profile, Research) in August said it would lend money to its Grampian Funding CP programme to repay maturing debt as market pricing was unacceptable. Market participants fear that more banks may be forced to take a similar decision, potentially reducing their appetite to lend elsewhere.
So, let's be clear. British banks are facing a liquidity crisis because no-one trusts the debt they package offshore in opaque funding vehicles with obscure names. What is more, in companies which they usually say they do not own. There is no mention of Grampian Funding Limited in the HBOS plc accounts for 2006. Nor in its annual return to Companies House -which I bought to make sure. This activity is therefore almost certainly 'off balance sheet' in a 'special purpose vehicle' with ownership being recorded as being in a charitable trust in Jersey to ensure it does indeed stay off the parent company accounts. This is normal for such a structure. But no one is fooled - the FT says Grampian is HBOS's. And no doubt it is, whether the accounts say so or not.
And what's the outcome? As the FT says:
Problems in funding so-called conduits - which are used to fund lending to clients and to invest in longer-term bonds backed by mortgages and other debt - have led banks to hoard cash in recent weeks and all but refuse to lend to each other.
That's why we have Northern Rock in a liquidity crisis right now, putting £24 billion of depositor's (that's people like you and me) funds at risk.
Now tell me that offshore does not impose a cost on society.
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Why would you claim that depositors in Northern Rock are at risk when in fact the Bank of England is undewriting them?
The people queuing outside Northern Rock today don’t seem to give that much credibility, do they?
And these things roll
I’m worried
Richard
Even if Northern Rock fails, deposits up to £33K are 90% protected. Feet on the street say NR will be acquired. So far. potential suitors are uncertain about the balance sheet – which says a lot.
Dennis
All true – and more to come from me on this as yet
But ponder this one: you\’re right that only 90% of most deposist is covered. Alistair Darling has said it\’s 100%. How much has that cost?
Richard
If anyone believes politicians then they’re crazy or naive 😮
Hasn’t cost anyone anything – yet.
Dennis
It has – seen the Northern Rock share price? You can bet a lot of people own then, directly or indirectly
And the Bank of England is lending at risk
So there is a cost
Richard
If the crisis at NR is because of non functioning market, it should be helped over the short term issue or medium term issue. An appropriate penalty interest rate ( note penalty already administered by the market). The depositors should be protected, the regulators should be reviewing this closely for anticompetitive behaviour.
The regulator should investigate if the problems at the big banks and hence reluctance to lend has caused this problem, rather than NR actions and think innovatively how to protect the public interest, without indulging private interests.
If NR is a victim because it is small then what happens when all the small institutions are gone!
Lets hope some calm and common sense returns including Real Independence for the BOE./FSA, If Europe would let us.
An ability to track and COMMENT WARN on if not control monetary growth as an objective target not just CPI.
Limiting corporate debt interest deductability may need to be considered including a review of accounting for offshore off balance sheet activity. Law or economic reality tests come to mind. Seem to remember this from +20 years ago.
Although the government some would suggest has done similar off balance sheet financing smoke and mirrors. PFI, Network Rail, non funded pension promises, taxing mostly private funded schemes (cf non funded schemes), ensuring that contacting back in to a non funded state scheme is ‘better’ increasing tax take initially.
Its not the governments fault or within its time horizon, they probably never expected to win 3 or 4 terms.
GB may need to think carefully how to make our system robust and to avoid short term interests political or otherwise harming the long term UK economy.
[…] unknown wrote an interesting post today onHere’s a quick excerpt […]
[…] I asked recently why no one was talking about the risks to ordinary people in the UK from the use of ’special purpose vehicles’ (SPVs) by banks such as Northern Rock’s Granite companies and HBOS’s Grampian set up. […]
Do you distinguish between a “liquidity crisis” and a market upward move in short-term rates?
To me, a “liquidity crisis” means that lending markets are closed. But this is not what has happened – banks just want higher interest rates to lend to each other.
Do you have any evidence that banks willing to pay the higher interest rate were unable to receive funding?
[…] any reasonably informed observer knew that HBOS suffered early exposure to the resulting issues. I mentioned it in September 2007 on this blog. HBOS’s securitisation vehicle, Grampian, was already in […]