Scott pours cold water on fears of a further UK bank collapse

Fears that other UK banks could be on the brink of collapse, forcing the Bank of England to mount a rescue operation akin to Northern Rock are "mis-placed scaremongering", according to Ted Scott, manager of the F&C UK Growth & Income Fund.

Scott believes that Northern Rock was an isolated case and its downfall resulted from the riskier way in which the bank conducted business. "Their reliance on the wholesale banking market meant that once the credit crisis took hold that source of funding became, to a large extent, closed. As a consequence, the bank did not have the balance sheet strength to support the enormous growth in mortgage lending, much of it at very thin margins and increasingly high loan to values, that it had financed over recent years whilst the housing market boomed. Indeed, in my view one of the main reasons for the excessive growth in the housing market was the reckless lending by the banks of which Northern Rock was the principal culprit," Scott commented.

Over recent months several UK banks, such as Barclays, have also shored up their balance sheets through rights issues, placings and attracting overseas Sovereign Wealth Funds to invest in the shares. "For some banks there remains the question as to whether they have done enough as they write-off assets relating to credit instruments, such as CDOs. At the same time they are being forced to write-off loans as the UK economy appears to be lurching into recession," Scott said.

"However most banks have much more diversified business models than Northern Rock that should help in the current crisis. They have now been addressing the situation for over a year since the credit crunch started, which is why the cost of obtaining a mortgage has risen despite interest rates having fallen over the same period."

According to Scott the lack of confidence in financial markets, as evidenced by the London inter-bank rate (LIBOR) remaining well above base rate, is likely to stay with us until the housing market shows some signs of stabilising and the economy has a firmer footing. "In the meantime the banks will find it tough going and may well have to raise further funds via the equity market or selling assets but another Northern Rock is unlikely," he concluded.