Thursday, 27 September 2007

The Price of Instability: the Market Decides


In comments to the previous post, it was suggested that any bank seen taking Bank of England emergency lending would be committing stock-market suicide. Is this right ? On the one hand, Northern Rock is certainly in a bad way – but this did not start with a BoE bail-out.

On the other hand we have Barclays, which on 31st August admitted it had needed some short-term £££ from the Bank “after a failure in a trading system” on 29th. It then transpired this was the second such call it had made in less than two weeks, which starts to look careless. Has this hurt Barclay’s share price ?

I’m not sure. Firstly, compare Barclays with another Aa1-rated bank, RBS. Their share prices have tracked each other quite closely since the start of the recent turmoil. In fact, RBS has lost slightly more value over this period. The one time Barclays dipped noticeably lower was on 28th August when it announced its exposure to the sub-prime market.

Now compare Barclays to Lloyds-TSB, the UK’s only Aaa-rated bank – see the chart above (data source – Yahoo Finance: full chart there). The initial parting of the ways 12th-17th Aug (a) was suffered likewise by RBS. The plunge on 28th was a Barclays-specific phenomenon (b), noted above. In the subsequent period (c) when its recourse to the BoE was revealed, it actually recovered somewhat and, like other banks, has stabilized into a pattern that is rather more volatile than in normal times, as you’d expect.

Unsurprisingly, Lloyds has done better - but by no more than might be explained by its higher credit standing (and perhaps a tad for Barclays’ “systems” failings).

Any other data or views ? (too many numbers ?!)

ND


14 comments:

Mark Wadsworth said...

Well researched, well summarised, well presented. No of course I have no other view apart from it is how you say it is. Quite why, we will find out with the benefit of 20:20 hindsight.

Shotgun said...

I'd have to say that before NR the banks may have been able to dip into the fund with impunity, but NR set the precedent for the public and this is going to have a knock-on effect in the future.

Let's face it...the market is built on perceptions.

Nick Drew said...

Thanks, Mark (takes small bow)

Shots - that sounds right: do we know whether such recourse to the BoE is always made public ?

It is of course noteworthy how keen Barclays were to blame their own needs on 'system failures': could be true, for all I know - and I guess insiders do indeed know - but evidently they didn't dare leave any doubt. Which is exactly your point.

Ed said...

Evan Davis has a good explanation of the secrecy thing. He says that until 97 there was an informal system but since the "transparency" rules were changed without thought of the potential consequences the system has been flawed.

Nick Drew said...

Ed - following your prompt I looked up the Evan Davis piece, which is a rather good summary.

If as he suggests we are at a fork in the road and must choose between a 'rational open' approach or a 'trust-the-authorities-to-do-the-right-thing-in-secret' one ...

... in matters like this I'd go with rational/open every time.

Wouldn't you ?

Anonymous said...

I think you need to look at the longer view. Both Northern Crock and Barclays share-price troubles started back on 1st March. I think the reason why Barclays was not caned is because 1] they handled the situation better by claiming it was a little technical difficulty caused by HSBC being naughty 2] the market had already priced in problems at Barclays.

Over the 12 month view I see HSBC having done rather better than Barclays despite the fact that they are far more exposed to US sub-prime. Obviously the market knew more about Barclays way back in March (a warning to those that don't work in the city to stay away from trading in shares I would say....)

Winchester whisperer said...

Surely the point about Barclays & RBS is who's going to get ABN Amro? Looks almost certain to be RBS. To my mind, that should be positive for the Barclays share price. I'm hearing that there could be quite a few redundancies coming at Barclays...

Nick Drew said...

anon - it is high time you came out of hiding !

Your contributions have been very welcome.

I have to agree with your last point: never bet on another man's game, eh ?

WW - another interesting perspective. And it is also the occasion of another data-point on CU's question re: commercial paper, since it seems RBS have just got € 5 billion away - with ease. (Liquidity crisis ? there's still a wall of money out there.)

http://business.guardian.co.uk/markets/story/0,,2179118,00.html

I envy you your location: cricket down by the river ...

Ed said...

I'd go with rational/open every time.

Indeed I would! The problem in this case is that the govt changed one process but not the other. Typical.

Lord Higham- Murray said...

...In the subsequent period (c) when its recourse to the BoE was revealed, it actually recovered somewhat and, like other banks, has stabilized into a pattern that is rather more volatile than in normal times, as you’d expect...

Short term, Nick.

mutleythedog said...

Its very worrying isn't it? I have been buying shares in all the banks to encourage them back up again...

Nick Drew said...

Mutt ! - I thought you had resolved to stay in cash !

Grateful though the banking system is for your efforts, I think you need a little word with His Lordship ...

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