City banks’ profits to suffer from credit crunch effect

Profits at the City of London banks are likely to be millions of pounds lower
than expected because of exposure to sub-prime derivatives, according to a
survey by US investment bank JP Morgan.

London will be the hardest hit financial centre in Europe as it has been at
the centre of developing mortgage-backed products. Trading in such products has
frozen after the sub-prime crisis in the US, as investors are no longer willing
to buy such products, reports the FT.

European banks will be hit harder than their US counterparts as their
reporting period for Q3 runs to the end of September, while the US banks
reported to the end of August, lessening their exposure to the credit crunch.

As the market for sub-prime instruments has dried up, the investment banks
will have to use complex modelling to find a fair value for the instruments to
book into their accounts.

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