Why are British banks so spectacularly unsuccessful? It strikes me that in the United Kingdom our bankers have been so much worse at their business than bankers in other developed countries. I shall explain.
The banking collapse affected all large banks in all developed countries. Most large banks had to be “bailed out” directly or indirectly by government support schemes, which were underwritten by the taxpayer. That in itself is bad enough as mostly the taxpayer lent its assets to supporting businesses on the basis that these businesses were too important to local economies to be allowed to fail. Unfortunately the taxpayer has not been paid an underwriting fee for its services. Apparently saving these terribly important businesses was reward enough.
The underwriting now, with the wisdom of hindsight, was made necessary by a lack of confidence in banks. Banks borrow from depositors and lend to borrowers. If the depositors fear that the borrowers will not be able to repay the money borrowed, then some depositors will seek to withdraw their money from the bank quickly, so that some other group of depositors are left without money.
This is essentially what looked like happening across the developed world, with a herd mentality making it necessary to protect a run on every bank. The underwriting did this, essentially protecting your own deposits with your own underwriting promises! It worked and confidence was restored.
However, again with the wisdom of hindsight, we have seen that in addition to some banks needing a short term underwriting to maintain confidence and prevent a run on the bank, other banks were not only affected by a crisis of confidence, but they had been run in such a way that they had no assets left to support the deposits that they had taken in the long term.
This arose because banks trade with each other. They buy and sell assets to each other, ostensibly to minimise risk. In the course of this trade some banks managed to sell assets for far more than they were worth. Some banks managed to buy assets for far more than they were worth. Some banks managed to do both at the same time.
So now that the dust has settled what do we see? Two massively large banks in the United Kingdom – Royal Bank of Scotland and Lloyds TSB – have bought much more in worthless assets from other banks than other banks have bought from them. So while, for example, banks in the United States are tarred with the disgrace of having had to be bailed out in the short term, they have recovered their solvency and have limited exposure to worthless assets.
These two banks in the United Kingdom are years away from recovering their balance sheets and are only now able to survive not just with government underwriting but with huge amounts of taxpayers’ capital. To get into this position they have clearly bought “toxic” assets from other banks – mainly American banks – which are now found to be worthless although RBS also has the distinction of having bought a bank – ABN Amro for many more times than it was worth.
All this draws us to three conclusions:-
- The banking crisis was a world crisis but
- British banks fared worse in the crisis by being fundamentally flawed in the way they did business compared with other banks because
- The United Kingdom banks were a repository for “investments” that were fools gold.
So we British are hopeless at banking? Are those that carried out the due diligence on these investments before they were bought fools? Was any due diligence actually carried out on some of these investments being traded for hundreds of millions?
All this points to a lack of competency in banking and associated services. This is odd, because successive governments have built the UK economy around banking, rather than around manufacturing because the British were supposed to be good at banking.
Of course, there could be another explanation – which is that the British Government ought to have monitored and controlled the activities of banking far more closely to ensure that excessive risks were not being taken. If a nation has a key industry upon which that nation depends it would be the duty of the government to ensure that key industry did not take excessive risks, would not it? Hindsight is a very useful tool. It cannot do much about the mistakes that have been made, but it can prevent people from making the same mistakes again. That, of course will only happen if those that made mistakes admit to them, won’t it, Mr Brown?