Why is HBOS in trouble?
Investor concern centres on HBOS's reliance on the money markets to raise funds to finance its business. Because of the credit crunch, banks are finding it increasingly hard to raise money this way. In addition to funding issues and its exposure to the mortgage market, there are questions about HBOS's strategy towards corporate customers, a business it has expanded rapidly since the merger between Halifax and Bank of Scotland created the bank seven years ago. The merger allowed the vast deposits accumulated by Halifax to help fuel Bank of Scotland's corporate banking operations.
What does HBOS say?
The assault on its share price forced HBOS to say that it had a "strong capital base" – enough money - to weather the storm. In July, HBOS raised £4bn in a rights issue as a cushion in preparation for what it thought would be up to four years of market turbulence. But the cash call was an embarrassment for the country's biggest mortgage lender as investors shunned the new shares. Dresdner Kleinwort and Morgan Stanley, the two City banks that guaranteed HBOS the funds in return for fees of about £90m, were forced to sell £3.8bn of unwanted shares on the stock market.
What role have speculators played in HBOS's plight?
HBOS has been the target of speculators betting on a possible collapse of the group. In March, the Financial Services Authority (FSA) announced an investigation of rumours by short-sellers that drove down the company's share price by 17% on a single day . The regulator subsequently admitted that it had not uncovered evidence that the rumours were spread by traders seeking to profit from manipulating the share price, but it warned traders of criminal action in other instances. In the latest crisis, Vince Cable, the Liberal Democrat Treasury spokesman, called on the FSA to intervene to stop short-selling of bank shares by hedge funds. "Speculation is a normal part of trading in shares," he said. "But on this occasion the hedge funds are betting against the taxpayer, since they know that if a leading British bank were to collapse, the government would have no alternative but to intervene."
What are the prospects of HBOS collapsing?
HBOS is too important for the government to allow it to go under. The knock-on effects of such a collapse could be seismic, undermining confidence in the rest of the banking sector. Think Northern Rock on a much bigger scale. Just as the US government stepped in to rescue AIG, the insurance giant, because of the implications for the financial system, so the same applies to HBOS. As well as lending money for homes, HBOS provides loans for big businesses and private equity deals. The bank says it has a large pool of deposits - £280bn - from savers and holds £1 in every £5 saved in Britain to make it the UK's biggest deposit-taker. Most of its funding - 52% - comes from these deposits but this is less than its major rivals.
What moves are afoot to help HBOS?
HBOS is understood to have approached Lloyds TSB over a possible merger and the reports have helped to halt the collapse in HBOS shares. It is likely that the authorities were pulling many strings in the background and that the highest levels of government were also fully informed about the plans being made to ensure HBOS survived. But a deal is by no means assured with Lloyds TSB, which already owns mortgage lender Cheltenham & Gloucester.
Would a merger be good news for customers?
It would be better than the loss of the bank, which could leave some savers out of pocket. Only the first £35,000 of your savings are protected if a bank collapses, and at HBOS that applies to total holdings across the group. A saver with accounts at Birmingham Midshires and Halifax, for example, could stand to lose money if the bank does fail. However, a merger will mean less competition in the mortgage, current account and savings markets, which will be bad news for consumers. With Alliance & Leicester already set to merge with Abbey and the disappearance of some small building societies in recent weeks, customers are going to end up with less choice of providers.
What will happen to HBOS shareholders in the event of a deal?
They will have to approve the deal before it goes through. The deal with Lloyds could value each share at 200p which would be good news for shareholders who have seen the value of their holdings plummet in recent months. HBOS has more than 2 million private shareholders, many of them customers who received shares when Halifax demutualised from a building society to a bank in 1997. At the time, the shares were worth 774p each, but at one stage this morning they had dropped to just 88p.
Which brands are part of HBOS?
The group offers mortgages, savings and investments across a wide range of brands, so some customers may not even realise they are with the bank. The main Halifax and Bank of Scotland brands offer a full range of banking services, from current accounts to mortgages. The web-based Intelligent Finance offers offset mortgages and savings; Clerical Medical provides pensions and investments; Insight Investments offers funds; Birmingham Midshires offers savings and mortgages.
What will this mean for the property market?
HBOS's problems are not good news for the property market which has already almost ground to a halt. The bank is the UK's biggest mortgage lender and recently reasserted its commitment to helping first-time buyers into the market. If Lloyds does take over it could scale back lending, making it even harder for would-be buyers to raise funds. Falling demand for properties has already pushed house prices down by more than 10% over the past year, according to Halifax's own measure, and a lack of mortgages could lead to further falls.
What happens to my mortgage?
Whether your home loan is with HBOS or Lloyds TSB, it should be business as usual. You will need to continue repaying your mortgage each month at the agreed rate. Even if a lender did collapse, you would not get out of repaying a debt – another organisation would buy up the mortgage book and collect your money each month.
