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The New Economy

Banking crisis: new wave of trouble looks familiar

By / January 20, 2009

The Royal Bank of Scotland says its 2008 losses could reach $41.3 billion, the largest ever for a British corporation.

Matt Dunham/AP

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A new crisis is washing over the world's banking system. But this time, at least, the shape of the wave looks more familiar.

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Last fall, banks and other financial institutions teetered on the brink because the housing bubble had popped. Now, they look shaky because of fears of a deep recession and the possibility of government takeovers. Banks have experience dealing with recessions.

The problems are global. Even before Bank of America and Citigroup announced huge losses on Friday, Ireland announced it was nationalizing one of its three big banks, and Germany's biggest bank, Deutsche Bank, said a logistics company partly owned by the German government would take a stake in it.

Bank shares plunge

On Monday, European bank stocks swooned as the Royal Bank of Scotland lost two-thirds of its value and the British government announced a second bank-rescue plan and said it was upping its ownership of RBS to 70 percent.

Now, the crisis is reverberating in the United States again. State Street Bank, a financial-services firm, announced Tuesday that its profits dropped 71 percent in the fourth quarter because it had to write down the value of some of its assets.

Déjà vu

It's not as if financial institutions haven't done this before.

For example: As concerns rose about its own viability last week, RBS pointed out that all of Britain's domestic banks are now technically solvent, using the guidelines that force banks to value assets at current market levels (even if they're extremely low).

Banks sometimes are technically insolvent in bad economic times. Typically, they have time to adjust until the value of their assets goes back up. This time, with greater transparency and quicker write-downs, that's a luxury markets might not allow.

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