November 14, 2007 (LPAC)--The Royal Bank of Scotland (RBS), the second largest bank in Britain, and the seventh largest bank in the world, is experiencing deepening problems, which includes a sizable exposure to the highly volatile credit derivatives market. RBS merely typifies the problem of the entire British banking system, that while it maintains a stiff upper lip, the rest of the body is decomposing.

RBS' stock price has plummeted from 691 1/2 pence to 387 1/2 pence, since the beginning of 2007, a loss in total stock capitalization of 29.4 billion pounds ($60 billion). RBS possesses billions of dollars worth of assets linked to CDOs, MBS, and other non-performing paper. On Oct. 31, Sandy Chen, analyst at the British investment firm Penmure Gordon, downgraded RBS' stock from "hold" to "sell", meaning that deeper problems will cause RBS stock to fall further. Chen told the Nov. 14 London Daily Telegraph, that his concern is that when an RBS-led consortium acquired the Dutch banking giant ABN Amro on Oct. 10 for $102.7 billion, it also acquired ABN's troubled financial condition. Chen noted that ABN Amro holds 1.5 trillion euros ($2.17 trillion) notional value of credit derivatives, which is more than 5% of all credit derivatives in the world. These are highly risky instruments. "Given the ongoing deterioration in credit markets and the pressures on some key counterparties, we see a risk of substantial mark-to-market charges." That is, these derivatives are going to be considerably marked down in value.

Citigroup financial analyst Simon Samuels warned that RBS is dangerously "ueber-leveraged." It does not have sufficient bank capital to cover all the future losses that are just over the horizon. As representative, the Royal Bank of Scotland indicates that the collapsing British banking system will soon be royally flushed.