To see how bloated the financial system in London had become, look no further than UK bank liabilities to non residents.
Between September 1986 and March 2008, non-resident liabilities increased by just over 1000 percent. At its peak, this number had reached almost 8 trillion dollars, representing about 400 percent of GDP.
Of course, UK banks also own foreign assets. However, the stock of these assets are $633 billion less than the amount of liabilities (we will deal with this issue in a later post). The key point here is that on a net basis; UK banks owe money to people who live overseas.
How have UK non-residents responded to the credit crunch? Well, they have been pulling their cash out of our banks. Since March last year, about $1.8 trillion has left the UK banking system; a drop of about 22 percent. In other words, investors are racing towards the exit.