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UK banks suffering from 'stress'
LONDON, England (CNN) -- Fears that a meltdown of Britain's red-hot housing market could severely strain the country's banking system have prompted a leading credit rating agency to place the industry on its high-risk list. Standard & Poor's, in a report released on Wednesday, said for the first time it was adding the UK to its list of countries facing potential stress on their financial sectors due to the risk of rising bad loans and lower revenue. It said the debt burden among UK borrowers was reaching "uncomfortably high levels, particularly with respect to those in the Greater London area."
Also placed on the S&P's stress list were Ireland, the Netherlands, Panama, Portugal and Spain -- which, like the UK, has avoided that designation until now. "Banks in mature economies are increasingly exposed to a fall in asset prices, notably residential real estate. Rapid growth in house prices during the past seven years has partially financed potential asset bubbles in many countries," the S&P report states. "The depth and timing of the problems likely to face any banking system are hard to predict with any certainty... For the most part, low interest rates and continued, albeit slower, economic growth have protected banks in mature economies from significant declines in credit quality." Those concerns echo comments by the Bank of England, which last week decided to keep interest rates on hold rather than cut borrowing costs as other major central banks have done in the past few months. The BoE's key lending rate -- which has a direct impact on the interest that banks charge their customers -- now stands at 4 percent, the lowest level in nearly 40 years. The bank last reduced its rate in November 2001 after a series of cuts aimed at reversing the economic downturn. But the bank has repeatedly warned that the UK housing market -- which has outpaced most other countries -- could collapse under the strain of mounting debt, as it did in the early 1990s. S&P said it did not believe the UK housing market was heading for crash but it warned that borrowers may find it increasingly difficult to repay their loans. However, the agency said banks are also at risk because of the high exposure by their insurance subsidiaries to equities, which have been plunging in value over the past year due to market volatility and economic uncertainty. "Several have had to support their subsidiaries and remain exposed to further capital injections if fragile market conditions persist. Even if no further support is required, the life operations are likely to be weaker contributors to earnings than the banks had assumed," S&P said in its report.
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