Tuesday, 26 February 2008

How big is the UK banking sector?

More than anything else, it was the UK financial system that drove the housing bubble. Banks put cheap money into the pockets of buyers, who in a frenzy of fear and greed, pushed prices up to the crazy levels we see today.

This week, I decided to take a few days out from posting on the blog and try to put together some data on the UK financial system. I wanted to get a better understanding of the banking behemoth. So the next few posts will be devoted to banking.

The growth of UK banking is nothing short of frightening. The first chart illustrates the growth of total assets, which mostly comprises of bank loans.

(Click on the image for a larger version of the chart)

Between 2000-2007, total assets held by UK banks increased by 121 percent. Back in 2000, total assets amounted to 330 percent of GDP; at the end of 2007, this figure had increased to 510 percent.

Actually, the bulk of UK banking assets are denominated in foreign currency. Moreover,this proportion has grown over time. Back in 2000, foreign assets acounted for 53 percent of all assets; today it is a fraction below 60 percent.

However, take a closer look at sterling assets between 2006 and 2007. Looks a little flat don't you think? Here is a closer look at how UK sterling assets changed over the last four years.

(Click on the image for a larger version)

Clearly, something nasty happened in August. Personally, I am not totally sure what it was; but I can think of three candidates. First, it is the credit crunch. Perhaps, the banking system suddenly took fright and stopped lending. Alternatively, the data could be picking up the effects of Northern Rock. Finally, it could be a data error. Incidentally, the fall last August is very large; some ₤368 billion.

I now have the consolidated UK banking sector balance sheet on my computer. I will investigate and report back what I find. In the meantime, any comments, views or discussion would be most welcome.

Data sources:

The data comes from the ONS; financial statistics, February 2008, table 4.3A, Banks: Balance Sheet, assets and liabilities. The ONS code for total sterling assets is TBIG, while the code for total foreign currency assets is TBJF.


Economic Despair said...

I can't wait for the next installment. Whodunit? The three suspects are lined up; credit crunch, northern rock or data error.

My money is on credit credit


The Real Lizzy said...

I'm a little shocked by the GDP numbers; the banking sector is five times GDP. So that is why almost everyone in London works in a bank.

Anonymous said...

A very interesting post, though (and I hope you don't think this rude) one which leaves a lot of questions unanswered. I'm trying to get a handle on how the banking system works, and it is not a shallow learning curve.

I'm bothered by the graphs... Personal debt is about £1.4trillion if you believe credit action (I do) which suggests that the vast majority of assets are non-consumer debt... This introduces a possibility (and I'm going to be very vague here) that it matters what was the purpose of the commercial loans. If they were repaid so quickly, then I'm guessing that the loans might have been a banking technicality (where interest received cancels interest paid, or similar...) Another possibility is that rather than an error, this was the correction of an error... for example wrongly accounted assets?

I look forward to reading what else you uncover... always interesting to see what someone else makes of the available information.

A.Steve (@ HPC)