First, let’s have a quick trip down memory lane. The financial crisis got going properly in the UK in August 2007, with the ABCP seize-up leading to the run on Northern Rock in September. Congdon illustrates how dependent banks had become on wholesale funding:
At June 2007 UK banks’ cash deposits at the Bank of England were £2.4bn ($4.9bn), while the notes and coin held in their tills were worth just under £8.8bn and their holdings of Treasury bills were under £8bn. By contrast, their total sterling liabilities were over £3,150bn.
Now I know there is more to liquidity than notes and coin but that’s illiquid. In fact roughly half of the balance sheets of UK banks was funded wholesale.
That funding simply packed up when investors started worrying about asset quality and counterparty risk. You could work down a list of UK banks, ordered by their dependency on wholesale funding, reading off who was next for the chop, and who might make it. Here’s what happened:
|Northern Rock||Nationalized February 2008|
|Standard Life Bank||Tiddler; taken over by Barclays, January 2010 after extended life support|
|Alliance and Leicester||Taken over by Santander October 2008|
|HBOS||Taken over by Lloyds TSB January 2009|
|Bradford & Bingley||Nationalized October 2008; disposal to Santander followed immediately.|
|Barclays Bank||Recapitalized by private investors. Did rather well out of the chaotic Lehman bankruptcy and the AIG bailout; hadn’t managed to buy ABN-Amro, which went to RBS and helped to sink them instead.|
|Abbey National||No change in ownership. May have had funding assistance from its parent, Santander|
|Lloyds TSB||Overwhelmed by HBOS’s toxic loan book after the takeover of HBOS, and part-nationalized.|
|Britannia Building Society||Merged with Co-operative Financial Services, a subsidiary of the mutually-owned|
|Clydesdale Bank||No change in ownership. May have had funding assistance from NAB, its parent.|
|RBS||Part nationalized in stages, Oct 2008 to Jan 2009|
|HSBC||Recapitalized by private investors.|
|Nationwide Building Society||Now the largest building society in the UK|
|Yorkshire Building Society||Now the second largest building society in the UK|
Something of a convulsion. Short version: the smaller failed banks vanished into big ones; the big failed banks are propped up by the Government; Barclays squeaked through; the old-fashioned mutual-ownership deposit-backed business model (Co-Op, Nationwide, Yorkshire), much scorned during the demutualizations of the late 1990s, had the last laugh.
But unfortunately that is nothing like the end of the story. When we roll the clock forward again to November 2010 we find that, despite earnest efforts by the survivors to cut gearing and balance sheets, the bloated wholesale funding requirements of 2006 and 2007 haven’t accompanied their originators into oblivion. No sirree. In fact, chunks of bank wholesale funding needs, represented by the balance sheets of RBS and Lloyds-HBOS (wards of state already, remember), are likely to resurface as major components of a giant UK funding programme for next year (I think the equivalent of ~USD800Bn of funding rollover in 2011, about a quarter of the worldwide total; I will hat tip any better-informed commenters and update).
If you thought of sovereign funding for Ireland was challenging, or for Portugal, or perhaps for Spain, or even for Italy, then – fear not, compared with just UK banks’ intentions, it’s on the small side. In the teeth of any shocks from the continuing Eurozone crisis, our banks are going to raise (that’s EUR292Bn) in funding in 2011, without anyone batting an eyelid. Just watch.
That’s yet another outing for the Implicit Sovereign Guarantee Moral Hazard Trade. Given our banks’ EUR100Bn+ exposure to Ireland, no wonder our chancellor is keen for UK to do its bit to help out over there.