Thursday, 12 February 2009

The unresolvable problem

The UK banking crisis is approaching its second birthday. Yet we are no closer to resolving the customer funding gap.

What is the customer funding gap? In the aggregate, firms and households have borrowed almost ₤800 billion more than they have in deposits. During the credit boom, this gap was filled by the wholesale lending market and securitization. Both those options are now dead, leaving a huge funding gap in its place.

Ideally, the answer would be for firms and households to borrow less and save more. Less borrowing means a recession. Moreover, borrowing would have to fall catastrophically in order for this gap to be eliminated. At the moment, the gap is well over 50 percent of GDP.

The savings option is also a non starter. In order to get people to put more money into their deposits, interest rates would have to be much higher. However, the Bank of England is now committed to a zero interest rate policy.

So, it is a problem without a solution. However, it is hard to see how the banking system could ever regain any stability with this massive mismatch between savings and loans. Therefore, the credit crunch might be with us for years.

18 comments:

Jelly bean said...

So here it is, the true magnitude of the crisis.

Anonymous said...

I thought there were 7 savers to every borrower - according to the meeja anyway.

AntiCitizenOne said...

You are looking at a graph of Gordons Potempkin economic miracle.

Roy said...

Anon 16:44

Obviously, each borrower was borrowing far more than the combined total of those seven savers.

Seema said...

Wasn't anyone watching this gap? What were the FSA doing?

VADO said...

Assuming that this chart is up to date ie it goes up to end-2008, then the situation has actually worsened as the credit crisis took hold.

We are going backwards.

toronto condos said...

"However, it is hard to see how the banking system could ever regain any stability with this massive mismatch between savings and loans. Therefore, the credit crunch might be with us for years." I personally think it's time for a big change of the whole banking system. I've just read an article about Islamic banking and it seems like what we'd really need here. Just search in google for Islamic banking, it's quite amazing.
Take care,
Elli

passer by said...

We are not in the realm of economics anymore, this is pure politics.

put 2 and 2 together and you get?

This is a link

This is a link too

Rick said...

Given that this is a phenomenon that hadn't really existed in over 300 years of banking history until 2001 its hard to see how any of these banks can even pretend to be solvent or how they will continue to function in the future.

When Japan lowered interest rates to zero it was because there were significant savings and people weren't spending. We have a completely different problem whereby savers can no longer afford to spend money because they are making nothing in interest and potential borrowers cannot get loans as easily because the banks do not have sufficient deposits. The BoE seems to be hell bent on destroying this economy.

Rick said...

I'm a big fan of Islamic law, if someone steals you cut their hands off! I calculate that thanks to the BoE I'm going to have around a £1000 of interest stolen from me over the next year - lets see how clever Mervyn King feels with no hands!

gw said...

Savings is not an option?

Sorry, but a lot of these securization were savings somewhere else on this planet.

Are you saying it is not conceivable that the UK population has to do with a lot less? Look to Island and reconsider. In fact the question is not whether but when (now or only slightly later) and how (managed or chaotic) and who.

mike said...

That's even less money to lend out to btl investors which in turn means a continuing drop in house prices for a long time to come.

Of course the funding gap would improve if there was a mass sell-off of BTL houses.

Anonymous said...

The Titanic has hit an iceberg. There is a life boat. Physical gold and silver in your own possession. Price is going up fast though.

Anonymous said...

This doesn't make sense. 97% of UK "money" is credit based. All deposits are backed by an equal debt, if you don't mind ignoring interest for the moment. The only way there can be a funding gap would be if the money was banked externally.
This statement, "In the aggregate, firms and households have borrowed almost ₤800 billion more than they have in deposits." does not represent a problem for the banks. Deposits are the banks liability, and debts are the borrowers liability. So if the banks obligations to depositors are so considerably lower than what they are due, then they are doing extremely well. So presumably this must be the other way around.
Basically this makes no sense.

yudansha said...

Anon, 08.02

Precious metals in your hands, a lifeboat.

Sounds logical but I think this is false reasoning in Britain. How safe do you think it will be ???

Got a panic room in your house ? Central station alarm ???

Anonymous said...

Anon @ 10.23

"Deposits are the banks liability, and debts are the borrowers liability. So if the banks obligations to depositors are so considerably lower than what they are due, then they are doing extremely well."

I thought that the fall in confidence that precipitated the credit crunch in the USA was due to the genie being outed from the bottle - the borrowers turned out to be duff.

The disparity here is the amount of duff borrowers - no-one quite knows how many there are.

Jo Jordan said...

Could you break the 800bn down for us?

1. Mortgages on value of houses

2. Mortgages split into value of houses if prices were consistent with 3xsalary and rest of mortgage

3. Credit card/HP more than one month

4. Credit card likely to be paid off within the month?

Thanks.

I'm collecting visual explanations of the financial crisis on my blog. Happy to add more to my list if you know of any.

Thanks again

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