Bad debts at top banks reach £85bn since onset of credit crunch

• Lloyds banking Group has £8bn of toxic loans
• Lenders say impairment charges are levelling off

• Jill Treanor
  
• guardian.co.uk, Sunday 9 August 2009 19.36 BST
• Article history

Jill Treanor

Bad debts at Britain's biggest banks have topped £85bn in the two years since the onset of the credit crunch.

An analysis of the bad debts reported by leading UK banks since the start of the credit crunch – officially two years ago yesterday – shows that during the first year of the crisis the charges rose gently. But as the credit crunch drove the economy into a recession, the distress faced by customers has mounted and led to more and more missed payments on loans.

The impact of the debts racked up by households and businesses has been greatest in the first half of this year when the big banks' impairment charges reached £35bn.

As a result of its takeover of the troubled HBOS empire, Lloyds Banking Group has incurred bad debts of about £28bn during the two-year period. This is a similar level to HSBC, hit by its ill-timed expansion into the US housing market.

Royal Bank of Scotland, 70% owned by the taxpayer, has totted up £16bn of bad debts in the period. Barclays stands at about £12bn and Northern Rock, the bank where the impact of the credit crisis hit first, about £1.5bn.

By the end of last week, the top banks had reported their results for the first six months of the year and indicated that impairment charges were levelling off. Lloyds reassured the City that the £13.4bn it was incurring in the first half would be the peak and that the worst was over.

Lloyds now faces speculation about its negotiations with the Treasury over the asset protection scheme to insure £260bn of its most troublesome assets. The talks have been going on since the outline scheme was first announced in January. Both Lloyds and RBS have said they will buy the insurance. Last week, the chief executive of RBS, Stephen Hester, said that the size of the assets being discussed had shrunk to £316bn from £325bn and that he expected to "haggle" for other changes.The assertion by Lloyds boss Eric Daniels that the bad debt charge has peaked has prompted speculation that the bank may try to reduce its reliance on the scheme. But to meet the Financial Services Authority stress test on its balance sheet it has been suggested that Lloyds may need to raise as much as £16bn.

City sources said Lloyds could try to raise enough funds from private investors to keep the taxpayer stake below 50%. It would rise to more than 60% under the current terms of the APS.

"Given the overall cost of the APS [£15.6bn insurance premium] it bears considering whether Lloyds should look at reducing the extent of its participation in the scheme," said analysts at Deutsche Bank.

Lloyds would not comment on the speculation. A spokesman said: "We're working with the Treasury to finalise the detailed terms of our intended participation in the asset protection scheme. We expect to conclude those discussions and agree terms that are in the best interests of our shareholders".

The Treasury said it was "continuing to work closely with Lloyds to finalise details of its participation in the scheme and will announce details in due course".

Ever since Adam Applegarth, former chief executive of Northern Rock, described 9 August 2007 as the day "the world changed", it has been marked as the official start of the credit crunch that stopped financial markets working, led to Northern Rock being nationalised and the near-collapse of the banking system in October 2008. The recession that ensued led to the change in the size of impairment charges. Applegarth was referring to a decision by BNP Paribas to suspend three funds because of the difficulty it was facing pricing sub-prime assets in the US, prompting the European central bank to pump £70bn into the market that day.