The whole banking problem has not been resolved. Between now and the end of the year there are going to be yet more failures, which may come through either as higher profile headlines via failure or nationalisation, or more likely with polite and quieter mergers behind the scenes.

In the US the FDIC (Federal Deposit Insurance Corporation) has said that the number of US banks now at risk has risen to a 15 year high, whilst the fund protecting customer deposits is also at its lowest point since 1983. In fact the number of banks seen as being at risk has now risen from 305 to 416 just in the past quarter – mind you to put this to some perspective there are around 7600 banks across the whole of the USA.

However this is not just a US issue but also back in Europe as well. Certainly in the UK it can still be argued that both RBS and Lloyds are technically insolvent if they were pushed to admit to all their losses and write downs. The fret over Lloyds over the past week about the cost of entering the Governments loan protection scheme has brought such issues to light. The questions for them now will be how to finance either their participation or avoidance of the scheme – so do they raise new money by way of rights or bond issues, or do they sell off quality assets in a dreadful market? This could include great names like Scottish Widows and Clerical Medical. Inaction is not likely to be an acceptable alternative.

However before everyone starts writing off the banks again, just remember that we are coming up to the first anniversary of the Lehman’s collapse on the 15^th September after which we entered that maelstrom of the banking crisis which threatened the stability of the capitalist system itself. A year later the system may still be damaged but it is better than it was and it is slowly being repaired –although in my view not fast enough in the UK.

What though is frustrating is that the political leaders do not seem capable of focussing on anything other than the populist, although no doubt controversial, subject of bonuses. Here we are just at the most critical moment for companies trying to pull out of recession and yet we still have a dysfunctional banking system with restricted capacity and rising charges.

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Later this week we will have the announcement from the Bank of England about base rates and in all likelihood they will remain the same at 0.5%. Of course we have all seen that interest rates have been rising for some months with anyone borrowing money suffering significantly higher rates than before – and often with eye watering arrangement fees.

However there is an area where the interest rate might be cut, and possibly turn negative, is in the excess reserve accounts that the banks have with the “Old Lady”. Now these rates aren’t generous but it has been apparent that the banks have been so risk averse that they have been preferring to keep money secure with the Bank of England, rather than to risk further lending out in the commercial world. It is amazing to think that reserves deposited by the banks at the Bank of England has grown from £28b a year ago to £161bn today (with so much money in its coffers perhaps the Old Lady can now afford to tidy up her rather tatty looking building on Threadneedle Street).

In order to force them to do something else with their money, could the Bank of England actually make these rates negative – so that if banks really want to keep their money in the Bank – they will have to pay interest for the privilege!  The central Bank of Sweden, the Riksbank,  has already started charging negative rates on the krona and the mere threat of the Bank of England doing the same has pushed down yields on one year gilts to a mere 0.45%.  Hopefully this will feed through to the high street in the not too distant future!

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It is that time of the economic cycle when spontaneous combustion seems to break out in what would have seemed to be previously inert warehouses. Normally during recessions there would have been a range of conflagrations in and around Glasgow by now, except for the fact that they have already been engulfed and destroyed in previous recessions. Thus it comes as no surprise to hear that the insurance industry have been growing suspicious at the recent spike of fire claims and the potential for some relating to arson events. Well if you can’t rent out property anymore you are going to suffer a cost as you will have now to pay commercial rates on empty buildings. So then you either you bulldoze it (and yes that has already started) or torch it!

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And finally a sign of the recessionary times…………B&Q have announced that they are to start selling flat pack pigsties for a mere £300. This follows on after a record rate of sales of chicken coops which trebled last year, and a growing waiting list for allotments for would but vegetable growers. So we can look forward to news next year of escaped pigs and chickens turning feral, and roaming parts of West London as many realise it is more complicated than they thought and probably cheaper and easier just to buy bacon and chicken rather than grow them.

Have a good week.

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited