BANKING FIVE YEARS ON
THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.
It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.
However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.
The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.
It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.
Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.
In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.
The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.
House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.
The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.
But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.
Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.
No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.
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ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.
Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.
Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.
Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.
Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.
Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.
But its return has been less than smooth.
In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.
PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.
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BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.
Even the most respected and safest names in British banking have found themselves in the dock.
The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.
London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.
And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.
There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.
But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.
The recovery, then, at best is being built on the most fragile of foundations.
Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.
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