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Biz - Money

A Decade After the Crash, British Banks Are Smaller and Poorer

Ten years ago today, a lender called Northern Rock, bloated with billions of pounds of risky mortgages, received emergency support from the Bank of England after the short-term funding it relied on dried up. Depositors lined up outside branches to get their money back, the first run on a British bank in 150 years. It was the start of a crisis the country still hasn’t recovered from.

  • Northern Rock asked for emergency support on Sept. 14, 2007

  • Barclays, RBS have together slashed $4 trillion of assets

Ten years ago today, a lender called Northern Rock, bloated with billions of pounds of risky mortgages, received emergency support from the Bank of England after the short-term funding it relied on dried up. Depositors lined up outside branches to get their money back, the first run on a British bank in 150 years. It was the start of a crisis the country still hasn’t recovered from.

Northern Rock wasn’t the only name to disappear: Bradford & Bingley was nationalized too, and beleaguered Alliance & Leicester was sold on the cheap. But it’s the big retail bank survivors where the legacy of the crisis can still be seen: two are vastly smaller than they were a decade ago, one of them is still state-controlled and all are less profitable.

In the years since an estimated 1.2 trillion pounds ($1.6 trillion) was pledged to support the financial system, the U.K.’s four largest domestic banks have slashed $3.6 trillion of assets by exiting foreign countries, closing risky trading businesses and firing hundreds of thousands of staff. And they’re not finished yet.

The most drastic shrinkage has come at Royal Bank of Scotland Group Plc, still 71 percent owned by the state. RBS has cut its balance sheet to about a quarter of the size it was at its peak after receiving the world’s largest single bailout in 2008 and 2009, totaling 45.5 billion pounds. It has posted losses for nine straight years, and executives have said it’s headed for a tenth.

Barclays Plc has cut half its assets in the past eight years amid a retreat to London and New York, while incurring billions of dollars in fines for rigging interest rate and currency markets.

By contrast, Asia-focused HSBC Holdings Plc has grown modestly in size over the same period, even as it has exited less profitable or strategic emerging markets. It has also been hit by fines for compliance failings and ignoring U.S. sanctions. 

Lloyds Banking Group Plc is also bigger than it was a decade earlier, but at a cost. It absorbed the assets of HBOS Plc in a government-orchestrated merger during the crisis, which ultimately played a large part in its subsequent nationalization.

Profitability Plunge

Improved profitability has been elusive. The average return on equity has plunged from 18.4 percent in 2007 to 4.5 percent today, data compiled by Bloomberg show, as lenders continue to build capital buffers and pay fines. Investors typically demand a minimum return of 10 percent, known as the "cost of equity." None of the four lenders exceed that threshold.

Mortgage lending has never recovered, falling to about a fifth of pre-crisis levels, according to data from the British Bankers’ Association. The crunch has been driven by the slow recovery of house prices in northern England, which left many borrowers in negative equity. While London property has boomed, taxes have risen on the capital’s landlords, while lenders have tightened underwriting standards.

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