The rock that will smash one or more of the Banks will not be the Credit Crunch nor the American Sub Prime, it will be Developer Sub Prime.
Developer Sub prime are lending advances, to Developers on Development Lands on high LTVs, on over optimistic valuations of Future property price and price growth, to individuals whose repayment capacity is linked to a perpetual appreciation of the property market.
To Date the peak paper values in the market are sustaining roll overs of interest,simply because there is neither income nor cash flow to make interest payments.
The Value of the land banks fall while the amount borrowed against them increases. The dealing cost on acquisition of development land is 9% plus fees so even to break even after a year you need to sell for 116% to 122% of the purchase price to cover Stamp Duty and interest from 7% to 12%
The Nature of Development Land price increase and decrease is such that because of the relatively fixed nature of the construction cost the land price takes the pain or the gain on any price movement.
The only salvation for Land Banks with high levels of borrowing would be inflation out striping the cost of borrowing for a number of years, but even that is a forlorn hope.
From the peak of the boom to the trough of land value that in my opinion has yet to come probably after 2009, as the banks will play chicken with the recession for another while, the value of the National Land Bank will probably decline by 50 Billion to a 100 billion.
The strange contradiction at the moment is that banks and valuers and owners are maintaining that the land retains its peak value while the borrowing on the lands increase. At the same time no one is buying as there is no finance to buy. ( The banks dont think its worth the peak value or the half of it if you are buying)
Even if prices stood still highly borrowed developers would still make a loss as the cost of dealing and interest would require appreciation of 16% to 22% just to break even.
Banks are lending huge multiples of their own capital up to 15 times.
What would happen to a bank if it lost 50% of its capital?