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Wednesday, July 10, 2013

UK banks are 5 times bigger than UK economy

Today’s fun fact from John Lanchester:

Andrew Haldane, director of stability at the Bank of England, put it in a historical overview a few years ago, ‘there is one key difference between the situation today and that in the Middle Ages. Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.’ Yes, it has: and the sovereign at risk is us. The reason for that is that in the UK bank assets are 492 per cent of GDP. In plain English, our banks are five times bigger than our entire economy.

(When the Icelandic and Cypriot banking systems collapsed the respective figures were 880 and 700 per cent.)

This is an apple and orange comparison we shouldn’t take too seriously, except to understand that the systemic risk that banks pose to western (and non-western) economies is large.

I’ll try to post some numbers for the U.S. for comparison.

But before we leave the British banking scene, we might add this from Lancaster’s article:

In the words of Mervyn King’s last speech as governor of the Bank of England, at Mansion House on 19 June:

the sheer size and complexity of global banks have led to failures of governance.Governments, regulators, prosecutors and non-executive directors have all struggled to come to terms with firms that pose a risk to taxpayers, cannot be prosecuted because of their systemic importance, and are difficult to manage because of their size and complexity. It is not in our interest to have banks that are too big to fail, too big to jail, or simply too big.

He was right about that, but let’s hope he was wrong about what he said next: ‘Solving these problems is the work of a generation.’ It’s not clear that we have that much time.

And we might note that these British banks are over here, as well. For example, a branch of the Royal Bank of Scotland is less than a mile from me (Charter).