Section 2: Structure of the financial system

Chart 2.1 Major UK banks’ aggregate balance sheet as at end-2007(a)

Sources: Bank of England, FSA regulatory returns, published accounts and Bank calculations.

(a) Nationwide data are as at end-September 2007.(b) Includes borrowing from major UK banks.(c) Includes (among other items) loans to UK-resident banks and other financial corporations and holdings of UK government debt. (d) Includes Tier 2 capital, short positions, insurance liabilities and derivative contracts with negative marked-to-market value.(e) Assets are not risk weighted. As a percentage of risk-weighted assets, Tier 1 capital is 8%.

Chart 2.2 Major UK banks’ funding sources as a share of total liabilities as at end-2007(a)

Sources: Bank of England, FSA regulatory returns, published accounts and Bank calculations.

(a) Nationwide data are as at end-September 2007. (b) Includes borrowing from major UK banks. (c) Includes Tier 2 capital, short positions, insurance liabilities and derivative contracts with negative marked-to-market value.(d) Assets are not risk weighted. As a percentage of risk-weighted assets, Tier 1 capital is 8%.

Chart 2.3 Types of exposure as a share of major UK banks’ total assets as at end-2007(a)

Sources: Bank of England, FSA regulatory returns, published accounts and Bank calculations. (a) Nationwide data are as at end-September 2007.(b) Includes (among other items) loans to UK-resident banks and other financial corporations and holdings of UK government debt.

Chart 2.4 Annual growth in major UK banks’ lending to UK households

Sources: Bank of England and FSA regulatory returns.

Chart 2.5 Major UK banks’ contributions to mortgage lending growth(a)

Sources: Bank of England, FSA regulatory returns and Bank calculations. (a) The aggregate growth rate is constructed using the monthly growth rates for each major UK bank weighted by its share of the peer group’s total mortgage lending in the previous month. By construction, this is slightly lower than the growth rate of total mortgage lending presented in Chart 2.4.

Chart 2.6 Major UK banks’ net interest margin(a)(b)

Sources: Published accounts and Bank calculations.

(a) Data exclude Banco Santander.(b) Barclays’ figures estimated from 2005 from annual accounts.

Chart 2.7 Major UK banks’ annual write-off rates(a)

Sources: Bank of England, FSA regulatory returns and Bank calculations.

(a) Calculated quarterly as write-offs over previous year divided by average stock of lending. (b) Dashed line shows the rate excluding a one-off write-off of £0.7 billion in 2005 Q4, which distorted the series. (c) Data exclude Nationwide.

Chart 2.8 Annual growth in major UK banks’ lending to UK private non-financial corporations(a)

Source: Bank of England.

(a) Data exclude Nationwide.(b) Includes lending to real estate companies.

Chart 2.9 Major UK banks’ stock of lending to UK private non-financial corporations(a)

Source: Bank of England.

(a) Data exclude Nationwide.

Chart A Major UK banks’ exposures to commercial real estate(a)

Sources: Bank of England, IPD and Thomson Datastream.

(a) Data exclude Nationwide.

Table 1 Impact of defaults on main UK commercial property lenders

Baseline(a)(b) Sensitivities

Loss given default (per cent) 40 40 40

Default rates (per cent) 1.5 5 10

Exposures of main UK lenders at end-2007(c) (£ billions) 127 127 127

Implied write-offs (£ billions) 0.8 2.5 5.1

Implied write-offs (per cent of pre-tax profits) 3 9 19

Sources: Bank of England and De Montfort University survey.

(a) Based on the minimum loss given default on secured lending under the internal ratings-based approach of Basel II.(b) Based on the proportion of loans in breach of covenants at 2007 H1.(c) Exposures via direct lending to UK commercial property companies.

Chart 2.10 Major UK banks’ customer funding gap(a)

Sources: Dealogic, published accounts and Bank calculations.

(a) Data exclude Nationwide.(b) Customer funding gap less securitised debt. Where not available, stocks of securitisations are estimated from issuance data.

Chart 2.11 Sterling intraday liquidity buffers(a)(b)

Source: Bank of England.

(a) Data are for the five major UK banks that are members of CHAPS Sterling.(b) Thirty-day moving average.

Table 2.A Major UK banks’ and LCFIs’ structured credit and monoline-related write-downs and exposures(a)(b)

US$ billions

Major European US securities US UK banks LCFIs houses commercial

banks

Total write-downs(c) 2007 H2 14 32 39 302008 Q1 –(d) 5(d) 13 17

Of which:US sub-prime 11 26 33 33Other US MBS and ABS(e) 1 2 4 2CMBS(f) 0 2 1 1Leveraged loans 1 4 7 8Monoline guarantees 1 3 7 3

Remaining exposures(g) 192 232 295 195

Memo item

Total assets 11,215 11,748 4,086 5,579

Sources: Bank of England, Bloomberg, published accounts and Bank calculations.

(a) Includes write-downs and exposures where information has been disclosed.(b) Balance sheet data for US securities houses and US commercial banks at end-2008 Q1 and for other institutions at end-2007.(c) Total write-downs on trading book assets and available-for-sale financial instruments announced on or before 24 April 2008.(d) Excludes provisional write-downs made by Deutsche Bank (US$4 billion), RBS (US$12 billion) and UBS (US$19 billion).(e) Mortgage-backed securities and asset-backed securities. Principally includes US prime and Alt-A residential mortgage-backed securities. (f) Commercial mortgage-backed securities. (g) RBS data for end-2007 include ABN Amro.

Chart 2.12 Major UK banks’ and LCFIs’ outstanding exposures to selected structured credit markets and

leveraged loans(a)

Sources: Bank of England, published accounts and Bank calculations.

(a) Exposures at end-2007, except for the US securities houses, US commercial banks and Credit Suisse, which are recorded at end-2008 Q1. Not all firms disclosed exposures to all categories.(b) Mortgage-backed securities and asset-backed securities. Principally includes US prime and Alt-A residential mortgage-backed securities.(c) Commercial mortgage-backed securities.

Chart 2.13 Major UK banks’ and LCFIs’ Value-at-Risk(a)(b)(c)

Sources: Bank of England, published accounts and Bank calculations.

(a) Standardised to US dollar 99% confidence interval and a ten-day holding period.(b) Data for selected institutions. Where unavailable, quarterly data are inferred from annual and semi-annual data. (c) Banco Santander included from 2005 Q1 only.(d) Includes (among other items) commodities and foreign exchange.

Chart 2.14 Changes in LCFIs’ assets during 2007 H2(a)

Sources: Published accounts and Bank calculations.

(a) BNP Paribas excluded due to lack of data on secured assets.(b) Trading assets adjusted for write-downs.

Chart 2.15 Monthly return on hedge fund strategies(a)

Sources: Bloomberg, CSFB/Tremont and Bank calculations.

(a) Maximum-minimum range and interquartile range calculated monthly from January 1994 to March 2008.

Chart 2.16 Dispersion of hedge funds’ returns by strategy(a)

Sources: CSFB/Tremont and Bank calculations.

(a) Dispersion calculated for each strategy as a three-month moving average of the standard deviation of monthly returns across hedge funds.

Chart 2.17 Outstanding global amounts of credit protection bought by institution(a)

Sources: BBA and Bank calculations.

(a) Amounts netted across long and short positions.

Chart 2.18 Major UK banks’ and LCFIs’ credit default swap premia(a)(b)

Sources: Markit Group Limited, Thomson Datastream, published accounts and Bank calculations.

(a) Data to close of business on 22 April 2008.(b) Asset-weighted average five-year premia.(c) October 2007 Report.

Chart A Monolines’ credit default swap premia(a)

Sources: Markit Group Limited, Thomson Datastream and published accounts.

(a) Data to close of business on 22 April 2008.(b) October 2007 Report.

Table 1 Current credit ratings for major monolines(a)(b)

Fitch Moody’s Standard Net par

Ratings Investors and insured(c)Ltd. Service Poor’s US$ billions

Ambac Assurance AA Aaa AAA 524 12 Mar. 08 12 Mar. 08 12 Mar. 08

Assured Guaranty AAA Aaa AAA 94 12 Dec. 07 14 Mar. 08 31 Jan. 08

FGIC BBB Baa3 BB 314 26 Mar. 08 31 Mar. 08 28 Mar. 08

FSA Inc. AAA Aaa AAA 406 24 Jan. 08 11 Mar. 08 31 Jan. 08

MBIA Insurance AA Aaa AAA 679 4 Apr. 08 26 Feb. 08 25 Feb. 08

XLCA BB A3 A- 18 26 Mar. 08 7 Feb. 08 25 Feb. 08

CIFG A- A1 A+ 95 31 Mar. 08 6 Mar. 08 12 Mar. 08

Sources: Financial statements and rating agencies’ reports.

(a) With the exception of Assured Guaranty and FSA Inc. and Moody’s rating for CIFG, all the monolines have ratings with a negative outlook or are on review for downgrade.(b) Date denotes last time rating was changed or affirmed. All ratings were AAA at June 2007.(c) Par insured outstanding at end-2007, net of reinsurance and other reimbursement arrangements.

Chart B Decomposition of monoline insurance by value

Source: Association of Financial Guaranty Insurers.

Figure 1 Diagrammatic representation of banks’ exposures to monolines

Chart 2.19 Incidence of common ‘large exposure’ counterparts during 2007 Q4

Sources: FSA regulatory returns and Bank calculations.

Chart 2.20 Major UK banks’ and LCFIs’ equity prices(a)

Sources: Bloomberg and Bank calculations.

(a) Data to close of business on 22 April 2008.

Chart 2.21 Major UK banks’ and LCFIs’ return on common equity(a)(b)(c)

Sources: Bloomberg and Bank calculations.

(a) Data for European LCFIs and major UK banks are half-yearly.(b) Data exclude Nationwide.(c) RBS data for end-2007 include ABN Amro.

Table 2.B LCFIs’ market shares as lead arrangers and book runners(a)

Sources: Dealogic and Bank calculations.

(a) For period 1 October 2007 to 14 March 2008.(b) Residential mortgage-backed securities.(c) Data include RMBS backed by sub-prime and non-first lien mortgages.(d) Asset-backed securities excluding RMBS issuance.(e) Collateralised debt obligations.

Chart 2.22 LCFIs’ major revenue sources(a)

Sources: Bank of England, published accounts and Bank calculations.

(a) RBS data for end-2007 include ABN Amro.

Chart 2.23 Major UK banks’ and LCFIs’ equity option implied volatility(a)(b)

Sources: Bloomberg and Bank calculations.

(a) Mean option-implied volatility.(b) Data to close of business on 22 April 2008.

Chart A Major UK banks’ Tier 1 and leverage ratios, end-2007(a)(b)(c)(d)(e)

Sources: FSA regulatory returns, published accounts and Bank calculations.

(a) Ratios measured on a Basel II basis except Nationwide and RBS. (b) Leverage ratio estimated as Tier 1 capital divided by total assets adjusted for goodwill and other intangible assets. (c) Nationwide data are as at end-September 2007. (d) Data exclude Banco Santander.(e) RBS data for end-2007 include ABN Amro.

Chart B Major UK banks’ core (equity) and regulatory Tier 1 capital ratios(a)(b)(c)(d)

Sources: FSA regulatory returns, published accounts and Bank calculations.

(a) Ratios measured on a Basel I basis.(b) Core equity includes ordinary share capital, reserves and equity minority interests.(c) Data exclude Banco Santander and Nationwide.(d) RBS data for end-2007 include ABN Amro.

Chart 2.24 Tier 1 capital ratios(a)(b)(c)

Sources: Bloomberg, published accounts and Bank calculations.

(a) Weighted by total assets.(b) Capital ratios measured under Basel I except for US securities houses. Capital ratios for US securities houses measured as ratio of tangible common equity to total assets adjusted for secured assets, segregated assets, derivative liabilities, identifiable intangible assets and goodwill.(c) RBS data for end-2007 include ABN Amro.

Sources: Dealogic, company releases and Bank calculations.

(a) Refers to the end of each firm’s financial year. Goldman Sachs, Lehman Brothers and Morgan Stanley report to end-November, whereas the other institutions report to end-December.(b) Total write-downs announced on or before 24 April 2008. Includes Q1 trading updates for Deutsche Bank, RBS and UBS.(c) Issuance qualifying for Tier 1 capital completed or announced on or after end-2007. Excludes issuance to sovereign wealth funds, which is recorded separately.(d) Dividends announced or paid on or after end-2007.(e) Includes a rights issue by UBS (US$15 billion), approved by shareholders on 23 April, which was not included in this chart in the printed version of the Report.

Chart 2.25 Major UK banks’ and LCFIs’ dividend payments and capital raising since end-2007(a) and total write-downs