Winner: U.K. banks?

To most people, the British economy looks the most exposed to the fallout from the credit crunch. And there is a lot of truth in that view. The U.K. is experiencing a nasty slump in its property markets. Government and personal debt levels are out of control. With unemployment rising as well, a recession looks certain.

But as economies don’t always develop the way people expect, U.K. financial system may do well from the credit crunch. Besides, British retail banks made some timely deals which helped some international positions solid.

Barclays bought the North American business of Lehman Brothers Holdings Inc. for $1.75 billion. A bargain of the century. It establishes Barclays as a major force in U.S. capital markets.
Lloyds took advantage of the market chaos to merge with HBOS Plc, becoming a dominant bank in the U.K. saving-and-loan market. Lloyds paid with shares, no cash is changing hands. The 28 percent share of U.K. mortgage market will bring it huge profits once real-estate market stabilizes.

HSBC has sailed through the crunch and its shares have held their value this year. As its rivals get cut down, HSBC just looks stronger.

The capital market that emerges from the credit crunch is likely to be dominated by big retail banks, with relatively small and conservative investment banks attached to them. And the Europeans have far more experience of linking retail and investment banking than any of the U.S. lenders. U.K. banks have been doing it for generations. It also explained why I lost a bunch of money from my short position of GBP in foreign exchange market.