Friday, 6 March 2009

UK banking sector - 5.3 times GDP

The UK banking system is a wonder to behold. It is a veritable monster. However, it is also a stricken giant, stumbling around; and if it falls, it threatens to destroy the UK economy.

As of December 2008, total assets of UK deposit taking banks was ₤7.4 trillion - which is about 5.3 times UK annual output. That is a consolidated number; which nets out interbank lending. So, there is no double counting hidden in that grotesquely large total.

It wasn't always this way. We once had a much more modest banking system. Back in 1991, UK banks had assets totalling ₤1.2 trillion. In the intervening 18 years, the sector has grown by 501 percent. It has averaged a growth rate of almost 2.5 percent a quarter, which is around 10 percent a year.

This unprecedented and dangerous rate of growth was fueled by bad lending on a massive scale. There was little effective credit control or appraisal. Behind that 7.3 trillion number, there is a mountain of bad debts. This is why the UK government was forced to take over RBS, offer ₤500 billion of government guarantees, and is now on the verge of nationalizing Lloyds. The government is trying to hold the giant up, but its legs keep buckling.


AntiCitizenOne said...

trillion not billion.

Alice Cook said...

AntiCitizen one,

That was quick. I had only just posted it and I was still proof-reading. Nevertheless, I appreciate the vigilence. My spelling is poor; and I regularly confuse billions and trillion.

Somehow, I don't think I am the only one with this problem. I suspect that the FSA also have difficulty counting up the zeros.

Thanks again;


Mark Wadsworth said...

This is all the less reason to worry. Let's assume total assets are indeed £7,400 billion and total losses from credit bubble bursting are (worst case guesstimate) £100 billion.

That means that all creditors have to take a 1.35% loss on the chin and the matter is settled.

deepian said...

Mark Wadsworth says:" total losses from credit bubble bursting are (worst case guesstimate) £100 billion"

Is this a joke? Total losses will be well into the trillions, and are already being covered up substantially by fraudulent accounting, with the blessing of the fraudulent governments.

The banks are much bigger than the national economy, and the attempts to prop up the banks will wreck us economically and politically. Get ready for it.

JKA on Economics UK said...

This is some hold up! £ 1.2 trillion.
The Special liquidity scheme, the asset protection scheme, the credit guarantee scheme, the asset purchase facility, the working capital scheme, the bank recapitalisation scheme - now £100 billion alone. Total cost so far - £1.2 trillion over 80% of GDP but around 15% of bank assets.

No wonder the legs are still buckling!

Mark Wadsworth said...

Deepian, I was talking specifically about UK losses.

dearieme said...

Perhaps my punt in Kiwi dollars isn't daft; NZ doesn't have a bank system to rescue - its banking is all provided by Australian companies.

Anonymous said...

new Zealand's housing bubble was the most extreme in the world! 4 standard deviations above the mean, I believe. The NZ dollar is toast, there is no safety in paper, only in gold.

Mark Wadsworth said...

Re NZ dollars, I stated on my 'blog exactly when I coverted Australian dollars back to GBP on the assumption that GBP was oversold (just before New Year) and lo and behold, I was right, Australian dollar is down about ten per cent since then against GBP.