Bradford & Bingley swaps bowler hats for tin hats Monday, September 22, 2008
Hmmm, do you think the news that the FSA is preparing contingency plans for Bradford & Bingley ["B&B"] will increase confidence in the Company's future?
Having recently raised £400m extra capital and boosting its' Tier 1 capital ratio to 9.1%, you would think B&B would be in good shape. However, at issue is its' sizeable exposure to the UK mortgage market and more specifically mortgages that are considered most susceptible to bad debt e.g. buy-to-let market and self-certification mortgages.
B&B was downgraded by Moody’s last week, leaving its credit rating one notch above junk status. This downgrade would automatically cause other banks to reduce B&B credit lines. Most banks set internal credit limits to counterparties that are linked to ratings. Hence a downgrade reduces the credit line. Multiply this by each counterparty that B&B deals with in wholesale markets and this contracts the liquidity available to B&B to finance its' activities.
Yet the news will most probably cause retail depositors to be nervous or perhaps panic, regardless of the deposit protection scheme. This can only exacerbate problems facing B&B and drive it to seek safety with a buyer.
B&B management will be swapping bowler hats for tin hats this morning.