Rising tide of bad debts will flood over banks

House prices generally relate to highly-geared assets (mortgages on homes). As prices fall at rates not seen since the 1930s, equity is vanishing with a rising tide of negative equity the result.As long as people stay employed and can carry on servicing their debt, they can sit tight and wait for prices to recover to restore their equity. But with more people losing their jobs and the cost of servicing the huge debt pile already taken out, such as credit cards and other unsecured credit, mortgage arrears and repossessions will rise.

Optimists point out that although repossessions have started to rise, they're still way below the levels endured at the height of the last recession. But that's because we're still only at the beginning of this recession.

Over the next 18 months banks are going to face a rising tide of bad debts, arrears and repossessions. The worst hit will be those lenders who have focused on high loan-to-value lending, the buy-to-let market and the self-certification mortgage market where borrowers became their own credit controllers. Another source of worse-than-usual bad debts will come from the large loan books that some high street lenders bought from specialist rivals in a bid to bulk up in the boom. House price slide is worst since Great Depression.

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All of this brings me back to Bradford & Bingley. Assuming it succeeds in raising its £400m capital injection from shareholders it will be, in the happy words of its executive chairman Rod Kent, one of the best capitalised banks in Britain. Phew, because it's going to need to be. Given the profile of its lending (buy-to-let, specialist loan books and so on) it could be one of the worst hit for arrears and further losses and write downs on bad debts. It's going to need the capital it's raising now, not to give it a chance of weathering the onslaught to come, but to give it breathing space until a takeover can be agreed or a run off of its business arranged.