Croesus/The Investor's View:The week got off to a very bad start as more news emerged concerning the scale of the bad debt problem that is facing financial institutions worldwide.

Goldman Sachs downgraded the mighty Citibank to a "sell" as the brokerage firm stated that it expects Citibank to incur a further $15 billion of writedowns over the next two quarters, associated with its exposure to collateralised debt obligations, subprime mortgages, structured investment vehicles and leveraged loans.

Citigroup shares have now fallen by over 40 per cent so far this year, making it the worst performing company in the Dow. In Europe, Swiss Re announced that it was taking a $1.1 billion loss after insuring a client's portfolio exposed to the US subprime meltdown and related credit market turmoil. This was the first such loss reported by a reinsurance company.

The cumulative impact on share prices of banks and insurance companies means that the dividend yields on offer from several European and US banks are well in excess of 10-year bond yields, with a significant number of stocks offering yields of more than 6 per cent. In fact the yield on Royal Bank of Scotland, which has recently taken over ABN Amro, is now at a mouth-watering 8 per cent.

In more normal circumstances such yields would be quickly snapped up by avid investors.

These are not normal circumstances as the dark side of financial innovation and loose lending standards comes more into focus. In time, it may well become apparent that the current share prices of many financial institutions offer a unique buying opportunity.

Unfortunately, it would seem that we are still in the early stages of the cycle whereby institutions are struggling to quantify the magnitude of their bad debts. Possibly the most troubling aspect of the current environment is that most senior bankers seem to have been taken completely unawares by the magnitude of the bad debt write-offs. The scale of write-offs that have been announced so far is not the real problem.

Rather it is the apparent inability of financial institutions to quantify even approximately the potential scale of the problem. Fear that many financial institutions could be facing into large black holes has now overtaken investor sentiment. Many investors have lost confidence in banks' balance sheets given the great unknown regarding the true value of these assets. This fear may well be overdone as reflected in the lack of discrimination in the sell-off of financial stocks. The share prices of virtually all bank and insurance stocks in the US and Europe have endured large falls so far this year. Some financial stocks are likely to suffer further losses before the credit crisis ends. The problem for investors is that until more clarity regarding the magnitude of loan losses and asset impairment emerges, it is impossible to judge with any degree of confidence as to where the next asset writedown is going to occur.

Therefore, the probability that at least some financial institutions will have to cut their dividend is very high. It is estimated that European banks are currently paying out about 40 per cent of their after-tax profits in dividends. However, this dividend cost equates to about 85 per cent of free cash flow, which is defined as earnings minus the capital that has to be set aside to fund balance sheet growth. If credit markets do not improve, some banks could find that they have to cut their dividend in order to have enough capital to fund balance sheet growth.

How do the Irish financials stack up in this type of analysis?

The two main Irish banks pay out approximately half their earnings in dividends and most of their retained earnings are required to generate the capital to enable them to grow their balance sheets. The capital bases of Irish banks are reasonably good, with core equity ratios in the region of 5.5 per cent.

European banks on average have slightly higher capital ratios in the 6 to 6.5 per cent range. Therefore, viewed from an international perspective the Irish banks do not stand out from the crowd as being particularly well capitalised.

Most Irish investors would take the view that the Irish banks are less prone to the fall-out from the US subprime crisis than many of their international peers. This is probably true, but they are heavily exposed to a deteriorating Irish property market. If the Irish economy and property market were to weaken further than currently anticipated then bad debts would increase sharply at Irish banks. Dividend cuts will probably be avoided unless there is a really severe property bear market.

However, dividend growth rates are certain to slow appreciably from the 10 per cent plus per annum increases that have featured over the past five years. Until there is more clarity regarding the domestic and international economic environment, very high volatility in financial share prices will remain the order of the day.

How Nicola saved more than €1,300 on motor cover

Insurance giant Axa is in the middle of an advertising campaign extolling the value on offer from the company. A radio campaign urges people looking to save money on premiums to talk to the company and billboard posters tell students they can achieve savings of 40 per cent.

That's not the experience of one young Dublin driver. Nicola (24) has been with Axa since she first got a provisional licence. Initially, premiums on her small Daewoo were around the €3,000 mark.

Although these fell to around €900 when she got her full licence four years ago, they subsequently jumped again to around €2,000 when she acquired a two-litre 2004 Hyundai Santa Fe.

Last year, the premium was just over €2,050. Although Nicola has a five-year no claims bonus and premiums, in general, have been falling, when Nicola's renewal notice arrived at the end of September, it sought an increase of over €180 to almost €2,240.

"When the letter came in, I looked through it and that was the only figure I saw," says Nicola.

However, Nicola was working through Niall FitzGerald of insurance brokers FitzGerald Flynn in Blackrock and when she read the letter again, she noticed a second premium offer sourced by FitzGerald Flynn - this time from Hibernian - offering fully comprehensive cover for less than €930. Even now, Nicola can't believe the difference. "When I first started driving, Axa was the first port of call because my family already insured there.

"While I thought the figure was high, I just assumed that was the market rate and I would have just gone ahead and paid it if I didn't have the broker. I don't think I would have taken the time to ring around," she says.

"It does show the advantage of having a broker. He does all the donkey work."

"We treat every renewal as a new business case," says FitzGerald. FitzGerald Flynn charges €40 for the annual renewal but Nicola's experience shows how valuable an investment that can be.

Nicola now believes insurers need to take more account of people like herself who follow the rules, take extensive lessons, pass the test and hold a clean driving record rather than letting age and car size determine. As it is, she feels her loyalty to Axa was taken advantage of by the group, confident that she would again simply pay the renewal premium. For Axa, not only has it lost this customer, but Nicola will be pressing her family to ring around the next time their renewal notices land on the mat.