In a properly functioning financial system, banks are supposed to work like dating agencies, bringing savers and investors together. Over the last decade or so, UK banks have been doing much more than matchmaking.The chart above illustrates the extent to which banks have departed from its traditional role of intermediating between savers and investors. The customer funding gap is the difference between household loans and household deposits. Back in the early part of this decade, loans and deposits were broadly equal. Since then, the amount of household loans rapidly outstripped household deposits. By the middle of this year, the difference was about ₤737 billion, which is about 50 percent of GDP.
How did banks bridge this gap? They went to the wholesale money markets. They issued dodgy asset backed securities, with much of this funding coming from overseas.
This non-deposit bank financing has now all but dried up, which goes a long way to explaining why mortgage approvals have collapsed. It also partly explains why sterling has declined so dramatically. Foreigners are pulling their money out and as they do, sterling slides south.
Going forward, the UK customer funding gap is very likely to narrow and as it does, it will take house prices down with it. It will also lead to a sharp decline in household consumption and ultimately push the economy into a recession.
5 comments:
Huge loans, no savings, consumption boom. It was great while it lasted.
I assume the shortfall is cumulative? If it isn't - we are super-borked!
Yes even today there was some news about Lloyds turning down 30% of mortgage applications. I am surprised that mortgage rates are not much higher given how scarce money is.
While I know what you mean when you describe banks as dating agencies it's not entirely true. Part of the problem is that they have never been true intermediaries - more like software pirates making copies and lending them out at a price. I guess at least in the old days, however, there would have been one copy for every original.
Not much of that money was from abroad.
Apparently it was mainly from pension funds, taking all those lovely contributions and lending it back to the people who had made them in the first place, after having creamed off all their commissions (which by and large wipe out the value of the tax breaks), and now the pension funds would have gone and lost a lot of that money had the gummint not underwritten them, using, er, your money.
Verily, a brilliant way to run an economy.
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