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Are British Banks Sound As A Pound?

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Are British Banks Sound As A Pound?


Are British Banks Sound As A Pound?

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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The phrase "sound as a pound" used to mean something. It was as reliable as the British currency. After all, Her Majesty's government stood behind its money. But recently, a number of British banks have been at least partially nationalized by Her Majesty's government at a time when they are not inspiring much confidence. We turn to Philip Coggan of The Economist magazine in London to learn more about the troubled state of the British banking system. Good morning.

Mr. PHILIP COGGAN (Capital Markets Editor, The Economist, London): Good morning, Linda.

WERTHEIMER: First of all, tell us what's happening in the British banking system.

Mr. COGGAN: It's a mess, Linda. We've already had two banks nationalized. We've had two of the biggest banks in the country where the government now owns significant stakes. And the share prices of the banks have taken a fearful battering in recent weeks.

WERTHEIMER: So how does the crisis in Britain compare to what is happening here?

Mr. COGGAN: It's worse from our point of view because the banks are so big relative to the size of the economy. To take the four biggest banks in the U.K., they have something like assets of $4 trillion, which is around three times the size of the British economy. So it doesn't take very big debts or write-offs in those banks to cause a significant problem. A lot of the things that they owned - just as with U.S. banks - are very hard to price. They're very obscure sort of assets. And over the last 18 months, they've just been taking write-off after write-off and looking weaker and weaker.

WERTHEIMER: We haven't yet had a full-scale run on the banks. Has something like that happened, or close to happening, in Britain?

Mr. COGGAN: Well, we did have a run on the bank in September 2007 with a bank called Northern Rock, where we had people queuing outside for the first time, probably, in well over a hundred years. But in October, the government did step in, basically, to say that any big bank, it would help rescue. And that stopped us from having the kind of problem where people are worried about the safety of their deposits. So the concern has changed, really, from worrying about the banks to worrying about the effect of the government finances of rescuing the banks. So we have seen the pound take a very big hit over the last six months, particularly against the dollar.

WERTHEIMER: So what is it that the British government is doing?

Mr. COGGAN: It's doing a number of things. It's taken those equity stakes in banks. It's got 70 percent of one of our biggest banks, the Royal Bank of Scotland, for example. It is trying to find a way to buy assets off the banks, just as the U.S. government is doing. It's also agreeing to insure some of the loans that the bank makes against losses if the companies they've lent to, or if the consumers they've lent to, go bust.

WERTHEIMER: This sounds a great deal like the kinds of things that the Bush administration was doing in its latter days.

Mr. COGGAN: Yes, indeed. In fact, the same problems are coming up for Britain as come up in the U.S. or elsewhere, which is, if you buy assets off the banks, what price do you pay? If you pay a price that's fair to the taxpayer, it may be such a low price that it's crippling for the banks. And if you pay a price that is better than that and helps the banks out, then it's not fair to the taxpayer, and the taxpayer can end up losing money. And squaring those two things off is extremely difficult.

WERTHEIMER: So, what needs to happen now?

Mr. COGGAN: Well, we're working on a plan that we think in the long run - which will be a good bank, bad bank system where all the bad assets are put into one sort of pool and then run off over a period of years.

In the U.S. you had the Resolution Trust Corporation, which dealt with the savings and loans like that in the 1990s. But it's going to take a while for that to get set up. And while all that's being set up, of course, confidence is getting lower and lower with each week.

We have had at least one bit of good news recently, which is that Barclays Bank, one of the biggest banks, has come out with a statement saying its losses aren't as worse as people feared. Indeed it's going to announce a profit for the last year. And that has helped its share price bounce back after getting very low. But it's a sort of a lone swallow in a very bleak winter.

WERTHEIMER: Not that much good news from Philip Coggan, who is capital markets editor for The Economist magazine. Thank you, anyway.

Mr. PHILIP COGGAN: Thank you, Linda.

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