Santander PROBLEMS !!

[AtW]

The whole idea of capital ratios is that if you have investors calling in their funds that you have enough to repay.

So you think if the bank can attract £100 bln in cash that is kept as cash, then given that it is 100% liquid that bank will need 0% capital ratio?

[Cyberman]

Deposits are debts that banks owe.

http://en.wikipedia.org/wiki/Debt_to_capital_ratio

They took on a load of new debt, that alone eroded their previously very good capital ratio, they also had to put £1 bln from that into UK branch so now they have lower capital ratio but not because they were losing money like other banks (HBOS) but because they acquired a lot of deposits all of a sudden.

Liquidity and capital ratios are different things, they don't have problems with liquidity and capital ratios issue only comes from large acquisition of liquid debts.

Deposits also form a banks liquidity. Without deposits they cannot lend !!!!

[AtW]

Without deposits they cannot lend !!!!

And how did Norther Crock managed to finance those 125% morgages?

[Cyberman]

So you think if the bank can attract £100 bln in cash that is kept as cash, then given that it is 100% liquid that bank will need 0% capital ratio?

Those funds are 100% capital ratio if the bank has lent nothing. If its depositors decide that they all want their money bank the bank has it available and is 100% safe.

If the bank lends 94% of that money, then it has a 6% capital ratio. If the bank the wants to increase its capital ratio it can try to raise more deposits, sell shares in a rights issue, or go to the Arabs or HMG for a loan. Not too difficult to understand is it ??!!!

[Cyberman]

And how did Norther Crock managed to finance those 125% morgages?

From the moneymarkets, from deposits of savers, and from other investments (Bonds, Shares etc) that third parties made in Northern Rock.

[AtW]

If the bank lends 94% of that money, then it has a 6% capital ratio.

Tier 1 (core) capital

Tier 1 capital, the more important of the two, consists largely of shareholders' equity. This is the amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those shares are currently trading for on the stock exchange), retained profits and subtracting accumulated losses. In simple terms, if the original stockholders contributed $100 to buy their stock and the Bank has made $10 in profits each year since, paid out no dividends and made no losses, after 10 years the Bank's tier one capital would be $200.

Regulators have since allowed several other instruments, other than common stock, to count in tier one capital. These instruments are unique to each national regulator, but are always close in nature to common stock. These are commonly referred to as upper tier one capital.
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Taking on a shredload of deposits in cash won't improve your Tier 1 capital ratio, in fact it will make it worse as your existing shareholder funds will be dilluted by large amount of new debt you owe to other people even if its cash.

[DiscoStu]

Tier 1 (core) capital

Tier 1 capital, the more important of the two, consists largely of shareholders' equity. This is the amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those shares are currently trading for on the stock exchange), retained profits and subtracting accumulated losses. In simple terms, if the original stockholders contributed $100 to buy their stock and the Bank has made $10 in profits each year since, paid out no dividends and made no losses, after 10 years the Bank's tier one capital would be $200.

Regulators have since allowed several other instruments, other than common stock, to count in tier one capital. These instruments are unique to each national regulator, but are always close in nature to common stock. These are commonly referred to as upper tier one capital.
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Taking on a shredload of deposits in cash won't improve your Tier 1 capital ratio, in fact it will make it worse as your existing shareholder funds will be dilluted by large amount of new debt you owe to other people even if its cash.

Nobody's impressed when you copy and paste from Wikipedia.

[Cyberman]

Atw.... the whole point of upping capital ratios is to enable banks to cover themselves against a run. Extra liquidity enables this, and is thus a vital part of the capital ratio.

[AtW]

Nobody's impressed when you copy and paste from Wikipedia.

It's the definition of Tier 1 capital ratio, I highlighted the key element of it which is shareholder funds, this is relevant to current discussion since we are argueing over whether infusion of cash as in deposits could have helped them improve Tier 1 ratio, the answer to this is not and that's why they had to raise money.

[AtW]

Atw.... the whole point of upping capital ratios is to enable banks to cover themselves against a run. Extra liquidity enables this, and is thus a vital part of the capital ratio.

Read the article you posted (and provide next time URL):

"Instead, it moved £1bn from elsewhere in the group to its UK business, boosting the tier-one capital ratio for Abbey-A&L to about 9.25 per cent. Santander's group tier-one ratio stands at a much weaker 7.89 per cent and its core tier-one ratio is 6.31 per cent."

We are talking about Tier-1 ratio here, is that clear?

I've give definition of Tier-1 ratio above which is clearly about shareholder funds related, so as soon as they took on billions of new deposits in cash their Tier 1 ratio dropped because lots new debt was on bank (even if its cash - liquidity here is not relevant), so for UK branch they moved £1 bln of their own shareholder money to avoid having to use Govt bailout, wise move since they got the cash, however that resulted in drop of their Tier 1 ratio at home - not because they lost money but because they effectively took on lots of obligations in form of deposits, it's not liquidity issue it's capital issue.

Are we clear on this one now?