What if there had been no financial crash in 2008?
James Moore makes the case for regulations enacted after the banking crisis saving our bacon during the pandemic
Do we have cause to be thankful to the bankers that caused the financial crisis? No, I haven’t suddenly found myself a job with UK Finance or one of its member firms and nor am I writing this with a view to getting one. Perish the thought.
Some data Experian publishes today just raised the question “what if” in my mind. Let me explain. The credit-checking outfit confirmed what other data has also pointed to: a surge in mortgage lending after the UK tentatively emerged from a lockdown that it’s now tentatively going back into.
July saw a 13 per cent jump year on year, August and September 25 per cent each. Even with that, Experian expects to see a reduction across 2020 as a while, with a total of £216bn set to be loaned out compared with
£250bn last year. But with a bounce back in mortgage applications under way, lenders face a problem. Thanks to the economic mess created by the pandemic, it’s now much harder than it was to assess risk and to manage their portfolios. They’re dealing with the surge at the same time as a surge in the number of distressed accounts and out and out bad debt.
A total of 1.9 million mortgage accounts have, for example, sought an emergency payment holiday (EPH). Those accounts have an average balance of £150,000, 30 per cent higher than the £114,000 owed on mortgages, which have not seen a pause in repayments.
As a group, the people with EPHs on their mortgages have 300,000 of them on other credit products too. Given that Experian says one in three people have experienced a decline in income, with over half of those seeing a decline of 10-39 per cent, the numbers aren’t all that surprising. But they are disturbing.
These are pigeons that will come home to roost, and it’s not just mortgage lending that’s been affected. Back to the financial crisis. Those numbers would be a lot more worrying still, were it not for the measures taken to prevent a repeat.
Just think where we would be had the pandemic hit earlier and these changes – stronger banks, more interventionist regulation, more interventionist government – not been in place
While the last round of banking results was full of red ink, as provisions for bad debt rose sharply across the sector, banks’ capital ratios are significantly higher than they used to be. The current crisis is also being actively managed by regulators. Another change forced by the behaviour of the bankers which created the last crisis is that watchdogs have become a lot more interventionist.
They have already raised stop signs when particular banks or building societies have got too close to the riskier end of the lending curve. The Experian data suggests this is something to be welcomed. A final change emanating from the financial crisis: more interventionist government.
Banking bailouts were deeply unpopular, particularly given the lack of any calling to account for the people who made them necessary, but the consensus is that they were necessary to prevent a collapse of the global financial system. You can make a case that they played a role in clearing the pitch for the more sweeping interventions we have seen this time around. Laissez faire economics is out of fashion, and thank goodness for that.
Just think where we would be had the pandemic hit earlier and these changes – stronger banks, more interventionist regulation, more interventionist government – not been in place.
That could easily have happened. The cause of the pandemic has been described as a “novel” coronavirus but only because it’s novel to us. The chances are it was around 10 years ago. The wrong bat in the wrong market and it could have got out earlier, when banks, regulation and government appetite for intervention was a lot weaker than it is now.
It’s enough to make your shudder. So reasons to thank those bankers? Well no, because that’d be a bit like thanking the burglars who got into your home and trashed the place for you upgrading your security and making it more difficult for the next lot.
More correctly we should probably thank fate, or happenstance, or luck that the coronavirus emerged after the financial security system had been upgraded. If we get through to the end of this without a banking
crisis we will have dodged a bullet.
Of course, it’s still early days and the fallout from the current crisis will likely linger and create a series of mini crises down the line. Britain’s financial watchdogs, whether at the Bank of England or the Financial Conduct Authority, will need to be at the top of their games for some time. The rest of us had best buckle up.