The collapse of $308-billion-asset Washington Mutual,
the largest banking collapse in US history by far, and the
subsequent firesale to JPMorgan Chase for $1.9 billion, is the
biggest event of a tumultuous, shocking three weeks in the history
of the global banking industry – and the bad news keeps

US: Top 10 largest retail bank failuresThe once-mighty Wachovia has been sold to Citigroup
for a paltry $2.2 billion, with Citi taking on an initial $30
billion in bad debt; Fortis has been part-nationalised by three
European governments with an €11.2 billion ($16 billion) capital
injection; and the UK government has had to broker two desperate
deals in two weeks – the nationalisation and part-sale of the
county’s eighth-largest bank, Bradford & Bingley, and the £10
billion ($18 billion) sale of Halifax-Bank of Scotland, the
country’s largest retail lender with £681 billion in assets, to
rival Lloyds TSB.

And in an era where bad news can twist all too easily via media
hysteria and consumer panic into a bank run – now, more commonly,
online rather than at the branch (see News Digest) – some
institutions still look dangerously fragile. Royal Bank of Scotland
(RBS), which boasts $3.7 trillion in assets but remains heavily
exposed to debt-riddled US and UK markets, is under intense
pressure. RBS’s market capitalisation is now around $50 billion,
down 50 percent over the past 12 months despite its recent $24
billion rights issue. In the US, a group of huge, mid-tier,
regional players are also seen as vulnerable: Regions Financial,
Fifth Third, Sovereign (in which Santander has a 24.9 percent
stake) and National City.

In the US, the Office of Thrift Supervision (OTS) shut down
Washington Mutual (WaMu), once the sixth-largest US retail bank and
a group which described itself as “the Wal-Mart of US banking”,
after it was worried the bank would run out of cash: around $17
billion of deposits had been withdrawn in a week as the bank’s
customers panicked. At closure, the bank had about $308 billion of
assets but only $188 billion in deposits. “With insufficient
liquidity to meet its obligations, WaMu was in an unsafe and
unsound condition to transact business,” the OTS said in a
statement on 26 September.

In Europe, the collapse of bancassurer Fortis – despite repeated
denials by its management that there were any problems – is the
biggest shock so far, and ridicules the decision of the
RBS/Fortis/Santander consortium to buy ABN AMRO last year for $103
billion. Fortis’s market cap was just $19 billion the Friday before
its was rescued, 40 percent less than it paid for parts of ABN AMRO
last October (Fortis’s contribution was $35 billion at current
exchange rates). And, in a farcical turn of events, Fortis is now
looking to sell its ABN AMRO assets as part of its rescue deal –
estimates have put the price at between €6 billion and €11 billion
($8.6 billion to $15.8 billion).

Intense concerns over the US government’s trillion-dollar
bail-out of the wider US financial system – referred by many
analysts as “temporary nationalisation” – comes at a time when
other economies, predominantly in western Europe, look
treacherously poised. Over the past two months, the UK and, to a
lesser extent, German banking industries have undergone profound
change, while collapsing property markets in Spain and Ireland are
beginning to drag banks in these markets into the global

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Winners and losersUS: Interims figures for retail banking units

One important point to stress: while there have certainly been
many losers in a market polarised by chaos, there have also been
some winners – and never before has the world had so many
‘superbanks’. JPMorgan Chase, Barclays, HSBC, Bank of America,
Santander, Wells Fargo, BNP Paribas and ING have become the default
names bandied around when a bank needs rescuing and each has – so
far – managed to ride the volatility relatively well. Even
Citigroup, viewed recently as a lame duck with vast underperforming
assets, has enjoyed a relative renaissance as the deal with
Wachovia illustrates. In total, Citi will now have 6,845 branches
in the US (including its CitiFinancial units), putting it ahead of
Chase/WaMu’s 5,410 outlets but just behind Bank of America’s
7,213-strong franchise.

Still, the frenzied nature of some recent mergers and
acquisitions reveal an industry gripped by panic and,
significantly, political parameters. While Barclays and JPMorgan
Chase, for instance, come out looking good after their cut-price
acquisitions of Lehman Brothers in the US (for $1 billion) and
Washington Mutual, respectively, Bank of America’s $50 billion
all-share purchase of Merrill Lynch and Lloyds TSB’s all-share $20
billion deal for HBOS in the UK look expensive and value

Lloyds TSB, in particular, has picked up the UK’s largest
savings-and-loans outfit at the start of a UK savings-and-loans
crisis. Shareholders have good reason to ditch the deal though the
political pressure to push through the merger means the formation
of the largest UK retail banking group by customers (40 million),
branches (3,042), staff (140,000) and assets (£1.05 trillion – £681
billion from HBOS, £368 billion from Lloyds) will almost definitely

Evaporation of normality


UK: Numbers of branchesBut the past few weeks – since the last
RBI went to press – has seen the evaporation of not just
billions of dollars worth of assets but also the evaporation of
normal market conditions, processes and strategies. In has come
sweeping state intervention, the rush to form too-big-to-fail
‘national banking champions’ and a future industry shaped by
stiffer regulation, greater transparency and much less appetite for

It is an era where well-run, well-funded retail banks should
flourish as banks look to focus on solid funding models – in turn,
competition for retail deposits, already spicing up across the
world, will accelerate. It has been the retail banking giants that
came to the rescue of Wall Street’s Merrill Lynch, Bear Stearns and
(parts of) Lehman Brothers, while both Goldman Sachs and Morgan
Stanley have changed their legal status to allow them to accept
retail deposits.

In June, Stephen Green, chairman of HSBC, told RBI: “We
are seeing a profound shift, and this is a secular rather than a
cyclical trend. The huge build up of leverage has stretched balance
sheets over the last five years. Where profit depended on high and
ever increasing leverage, that model is gone – and that is because
it is bankrupt.”

He added: “That means success and profitability growth has to
come from the basic tenants of the banking profession. Customer
relations, operating efficiency and being in emerging markets are
going to be key.”

And the focus is certainly shifting, out of the US and the UK,
and towards strong developing markets. Perhaps the biggest
question, yet unanswered, is whether emerging superpowers such as
China, India, Russia and Brazil have the momentum, depth and
strength to support the wider global banking industry – or whether
the black hole of the US collapse will suck them down too.

China’s banks produced record interim results in August, for
instance, though most expressed concerns about the second half of
the year (see RBI 598).