Sunday, 15 February 2009

Just how big are the UK banks

UK banks are way too big.

In terms of assets, the largest bank - RBS - is significantly larger than UK GDP. The next two banks; Barclays and HSBC, are almost as large as GDP. Moreover, the fourth bank - HBOS - is about to merge with the fifth largest bank - Lloyds. When the merger is complete, that bank too will be almost as large as UK GDP. In short, the UK's four largest financial institutions are each as large as the UK economy.

These banks are far too large to be healthy. The UK economy is not large enough to bail them out. Whether New Labour it or not, the banking system must be downsized.

(The data source is Ed Harrison's Credit writedowns; website. Ed recently did a great post looking at Europe's 25 largest banks. Three out of the largest five were from the UK. No surprises there.)


Anonymous said...

UK banks, too big to fail, but impossible to save.

Anonymous said...

Your conclusion may be sound but comparing a lump of money with an annual flow of money is just a wee bit fake.

Alice Cook said...


Thanks for the comment.

I am not so sure about I agree with you. There needs to be some way to compare the size of UK banks with the taxpayer's capacity to bail them out.

GDP relative to assets is probably the best way of doing that.


Anonymous said...

Useful diagram, thanks. It would have been nice to have had the much smaller Northern Rock in there though. It would give people a better appreciation of the scale of the problem.

Anonymous said...

So as an individual I presume that I am also screwed if I take out a mortgage.

Aside from house price moves, it would be several times my yearly income. So by the same reasoning, it would be "too large to be healthy" for me to have a mortgage almost full stop.

Or perhaps, dearieme has a point.

Anonymous said...

We have an unhealthy over reliance on the banking sector full stop. IHMO.

If similar 'erronious' comparisons were made with other G7 countries I suspect the result would be telling.

Anonymous said...

Nice analogy 'First Anonymous'; extend it a little, and what this means is that all of us in the UK will be paying the banks mortgage for the next 25 years.

I (still) can't afford a house, but thanks to the stupidity of those banks, I'll have an opportunity to effectively pay the mortgages of people like you for for years to come...

Anonymous said...

Nice analogy 'First Anonymous'; extend it a little, and what this means is that all of us in the UK will be paying the banks mortgage for the next 25 years.

I (still) can't afford a house, but thanks to the stupidity of those banks, I'll have an opportunity to effectively pay the mortgages of people like you for for years to come...

Dave Page

Fred said...

The bottom line here is that we need financial institutions that are smaller.

As smaller ones go they won't be "too big to fail" and because of that they will be run in a sensible way to save their own skins.

It has also become apparent that these supersize institutions are run for the benefit of the senior management and without much regard to clients or shareholders.

Banking and the City is based on trust and confidence; those share prices will not recover in the foreseeable future. It is not hard to imagine investors (even pension funds) shying away from banks with a P/E greater than say 5 .... oops - what earnings!

Anonymous said...

Comparing bank size to GDP helps put things in perspective. However, we need more detail on how and when the bank size and GDP were calculated.

In terms of whether the given sizes are a problem, the overall structure of the banks and the economy would need to be looked at. On the face of it, a big group of assets can be sold and help with other problems. So the bigger the better!

Anonymous said...

HPC is usually interesting and intelligent but this is retarded. You are comparing balances sheets of banks against ANNUAL national income. GDP is what the UK 'makes' in just one year - on this basis the UK banks' balance sheetsm, whilst admittedly overextended, are not as 'scary' as you suggest.

Mark Wadsworth said...

What worries me about such comparisons is not only Dearieme's point, but the fact that there is double treble and quadruple counting involved.

If we merged all UK banks into one, we would find that the total would be a fraction of what you get by adding the above, because e.g. RBS owes HBOS £100 billion, which HBOS counts as an asset - HBOS owes HSBC £100 billion which HSBC counts as an asset and HSBC owes RBS £100 billion which RBS counts as an asset. That's not £300 billion of assets, that's zero assets.

AFAIAA, total UK bank lending TO or borrowing FROM non-financial institutions is in the order of £1,500 or one times GDP. And its not total assets that matters, it's net assets, which in the case of half our banks is in fact zero. So if we add up the net assets of those banks that have positive assets and ignore lending to/from other banks, we are probably down to a manageable number of rather-less-than-one-times-GDP.

These big numbers are put out by the banks deliberately to panic the government into thinking that they are 'too big to fail' and hence that they have to be bailed out.

Anonymous said...

Here I am asking for more data again.

Isn't GDP a measure of transactions?

And if we use assets as the measure of the banks, at what point do we value them? What we paid for them?

Again, shouldn't we distinguish money that is deposited as savings and entrepreneurial activity? We keep hearing "risk risk" as if it is a magical mantra. Surely money deployed as risk should be allowed to evaporate?

My ignorance here but it seems to me that government could have just 'divided the book'. How big is the part they needed to save?

Anonymous said...


Bank assets are a stock; GDP is a a flow, but it is perfectly acceptable to compare them. Economists make such calcuations all the time (public debt to GDP being the most well known number.)

In this particular case, the comparision is extremely pertinent, since GDP represents the capacity of the UK taxpayer to cover the losses in the event of a bank failure.

A simple example; supposing you had four banks each with assets of 100% of GDP. If each bank generated losses of 5% percent of assets, which needed to be covered by the government, then we are looking at a 20 percent of GDP loss to the taxpaper.

That is, approximately what the UK is looking at right now, in my humble view.

Anonymous said...

Another thing, it would be interesting to total bank assets to GDP over the last ten years.

I know what this chart will look like; it will show a massive increase in the size of the UK bank assets relative to GDP.

Unfortunately, the UK banking system is too big to fail. It has reached frightening proportions. Banks have no capital; lack reliable funding sources; and have a mountain of bad loans. This would not matter, but for the fact, that at least four of them have assets equivalent to 100 percent of GDP.

Anonymous said...

Whilst I agree it is misleading to compare gross liabilities without considering assets, it is perfectly legitimate to compare loans against gdp.

The reason for this being it is only through the profits or 'value added' on trade or 'gdp' (here I include true profit, wages and taxes) that you can service the interest on debt and therefore you can begin to get an idea of the scale of the problem.


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