London Scottish bank which was actually based in Manchester with some 10,000 savers and about 2000 employees effectively went bust on Friday after the FSA stopped the bank from accepting customer deposits due to the capital shortfall, the bank went into administration and a statement on the LSB website states that the company continues to operate so as to seek the best long-term solution for customers and creditors.

The small bank's business model had been geared towards financing loans to high risk lower income borrowers which had resulted in a loss of £15.7 million as reported in the last accounts of October 2007. The companies share price had collapsed to just 2.5p last Friday down from a peak of 129p set in February 2007.

Savers Protected

The FSA has stated that the Financial Services Compensation Scheme (FSCS) has been triggered to protect retail customer savings held in London Scottish Bank. In addition, the Chancellor of the Exchequer has announced that all retail customers eligible for FSCS compensation will be protected, including those with deposits above the FSCS limit of £50,000.

The FSA is working with the HM Treasury and the FSCS on the practical arrangements for paying back customer deposits.

Which Banks Are Next?

This marks just another marker in a trend that will see many of the smaller banks disappear whilst the government attempts to keep the big banks afloat via increasingly large capital injections and in the final stage nationalisation.

Typically small banks have exposure in the form of loans to other banks amounting to 30% of assets with the other 70% to customers. Against this sit the liabilities in the form of customer deposits and the shareholder funds that have over the course of the crash in the banking sector been more or less destroyed, which means it does not take many bad loans to tip the banks over into bankruptcy, i.e. cutting the dividends or staff and running costs will not make much difference if as expected the loan default rates soar, and unfortunately unlike the larger banks the Treasury and government are not interested in using tax payers money for capital injections and nationalisation of the small banks. Therefore the question should really be which of the small banks will actually survive the credit crisis?

Bankrupt Banks Risk Bankrupting Britain

The recent analysis - Bankrupt Britain Trending Towards Hyper-Inflation? , highlighted the dangers that the banking sector paused to the UK economy with the risks that should a wholesale nationalisation of the banks be required then that would lift total liabilities to the British tax payer by £5 trillion, in comparison to the £500 billion of official public sector net debt outstanding at the end of 2007. This extra liability would be on top of the deficit spending and borrowing binge that the government announced in the emergency budget.

On a related note the UK housing market forecast is due for an imminent update, subscribe to our always free newsletter to get the scheduled analysis in your inbox on the day of publication.

By Nadeem Walayat
http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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