IT is nearly seven years since the seizure of global credit markets which did for Northern Rock.
Getting on for six years have passed since the collapse of Lehman Brothers and the domino effect which took Royal Bank of Scotland and Halifax/Bank of Scotland to the brink. Yet the shadows still hang over the UK economy. Britain’s banking system is still feeling the after-effects. All this matters to household and business borrowers.
The banking crisis, and how it was handled, must be seen as one of the most important episodes in the history of post-war UK politics. Arguably it was one of the gravest challenges faced by any British government in peacetime. The banking system, taken for granted by most of the population to pay for life’s essentials, came close to collapse. Yet nobody going about their business in October 2008 had any inkling how vulnerable the nation’s financial infrastructure was. Nobody, that is, bar a small group of policy-makers and Ministers working frantically in Whitehall and the City of London.
Lessons had been learned the previous autumn when Northern Rock had gone cap in hand to the Bank of England for an emergency loan. News of its plight resulted in queues of savers building up outside branches. Humiliating television images of the bank run were watched in disbelief around the world. Was this really happening in the global financial powerhouse of London? Investor perceptions of British banks were tarnished and that would contribute to the mass withdrawal of funding from HBOS and RBS the following year.
Britain’s financial defences were woefully unprepared when the Northern Rock debacle unfolded. There was no resolution regime – that is a legal tool box for regulators to step in and deal with a stricken bank over a weekend. The authorities were left floundering, seemingly unable to find a robust and rapid solution for the Rock. The deposit protection scheme offered only a 90 per cent guarantee on most of a saver’s cash so there was a clear incentive to withdraw money at the first whiff of trouble. On both issues – resolution and deposit protection – regulators knew a few years before the Rock crisis that new modernising legislation was required yet nothing was done.
The Treasury, Bank of England and Financial Services Authority acted swiftly after the Northern Rock drama which resulted in its nationalisation. A resolution regime was created, more staff were drafted in and a close watch was kept on every potentially vulnerable bank or building society. Just before the Easter weekend in 2008, rumours about the plight of HBOS swept through the City. These were dismissed as malicious gossip designed to undermine the share price. But it has since become clear that the bank was indeed battling for survival.
After the collapse of Lehman Brothers in September 2008, financial contagion swept through leading economies. Lloyds, aided by pledges from the Government to waive competition rules, said it would take over HBOS. But another giant of the banking system, which regulators had assumed was relatively stable, was hurtling towards potential disaster. Royal Bank of Scotland, larger than the entire annual output of the UK economy, was on the brink. Ministers and their advisers worked behind the scenes on a plan to recapitalise the leading banks, propping up their balance sheets with taxpayers’ money, and providing state guarantees for inter-bank lending.
A staggeringly large bill had to be paid to stave off disaster. But could Britain afford it? Might foreign investors conclude that the UK’s public finances could not take the strain and the game was up? Yet doing nothing might have seen cash machines closed, depositors panicking and troops on the streets. These were the appalling dilemmas facing Downing Street, the Treasury and financial regulators in the darkest hours of the crisis. As political leaders in the United States confronted challenges to their own system, their British counterparts could rely on nobody for help. A solution had to be found and fast. To their immense credit, a rescue package was unveiled and markets were reassured. The American and European authorities followed the British lead with their own recapitalisation schemes.
But saving the banks was one thing – securing their future to the benefit of taxpayers and borrowers was another. Decisions made since the traumatic weeks of October 2008 have since been called into question. Some leading policy-makers involved at that time have told me that, with hindsight, more radical action should have been taken. RBS, they argue, should have been nationalised and then broken up into “good” and “bad” banks in the same way as Northern Rock. Under that scenario, a “good” bank”, with the NatWest brand, might have been floated off and started lending to the recovering economy. The possibility of taking HBOS under state control, leaving Lloyds to continue as a relatively clean bank, was also considered.
The Labour government and then the coalition chose to allow RBS to run as a “standalone” bank even with a more than 80 per cent stake held by the taxpayer. It is still not repaired and the chief executive has said it will be a full more years before recovery can be delivered. There seems no chance of the taxpayer’s £45bn investment being repaid any time soon. Meanwhile some businesses are still struggling to get credit with lending by RBS to small firms falling in the first quarter of 2014.
Public appetite for explanations of the banking crisis remains high. The damage to the nation’s credit supplies has not been fully fixed. That’s why the banking crisis of 2007 and 2008 and its aftermath remains one of the big public policy issues of our times.
• Hugh Pym is a BBC correspondent and author of Inside the Banking Crisis, published by Bloomsbury, price £20. He in conversation on Thursday, July 10, at 2.30pm at St George Hotel, Harrogate, as part of the Raworths Harrogate Literature Festival.