Tuesday, October 07, 2008

The risk premium

It looks like several hundred thousand people in the UK have discovered the meaning of the risk premium today. Whilst it's difficult not to have sympathy for all these people who have potentially lost money, it may help everybody else realise that no place is a completely safe haven for your savings and not all banks are made equal. So how to tell if a bank could be in difficulties? Well, firstly look at the rates they are prepared to pay to get hold of your savings. Banks don't offer higher rates because they are generous people who want to make you happy, it is fairly likely they are after your money because they need it because they are short of capital, which suggests they are more prone to fail. And that is the risk premium, you get a better interest rate because you're more likely to lose your money.

Another thing to look at is CDS spreads. Unfortunately these are difficult to get hold of unless you happen to have access to a Bloomberg terminal. Here's a list from about three weeks ago, a higher number means the market considers the bank to be higher risk. And as you can see, quite a few of the banks near the top of the list have already got into difficulty. It was this list (along with the failure of Glitnir) that made me pull my money out of Icesave (Landsbanski) a week ago. Phew.

Kazkommerts 1040
Glitnir Bank 950
Kaupthing 850
IKB 625
Wachovia Corp 572
VTB Bank 570
Landsbanki 550
Anglo Irish 485
Banca Italease 462
Capital One Bank 424
HBOS 327
Bank of Ireland 310
Allied Irish Banks 268
Citigroup Inc 264
Nationwide 230
Bank of America 201
Standard Chartered Bank 199
Natixis 192
JPMorgan Chase 191
Wells Fargo 188
UBS 183
Barclays 169
Erste 166.7
RBS 162
Raiffeisen 150.0
Fortis Bank 149
Danske Bank 138
ING 133
Credit Agricole 127
Credit Suisse 124
Lloyds 123
Societe Gen 122
ABN Amro 119
Dresdner 118
Santander 117
Deutsche 114
Commerzbank 111
Standard Life Bank Ltd 108
Unicredit 95.2
Nordea Bank 91
BNP 73
Svenska Handelsbanken 72.3


Simon Biltcliffe said...

very useful- thank you!

Anonymous said...

Yay - so there is use me having a HSBC account and my savings are in a Santander Subsiduary(quickly moves money to Svenska Handelsbanken).

Now if only I could actually get 7.5% (strangely my 10% Savings Account earnt me about 5.5% - RIPOFF!)

Doogal said...

This has been a very popular post. In fact a lot of the visitors have come Svenska Handelsbanken, probably feeling quite pleased that their employer isn't looking in any trouble. Having said that, the CDS figures are quite out of date now and if anybody reading this has access to a Bloomberg terminal I'd love to know what the figures look like now, expecially after the bailouts of the last few weeks.

Personally, most of my savings, except for a small emergency fund, have now been used to pay off a chunk of my mortgage. One thing's for sure, if any other banks do go belly up, any debt with them won't be written off. And the savings I make on my mortgage payments more than make up for lost interest.