Bank of England Tells Us What We Already Know on Banking Sector

The Bank of England has published its bi-annual report on the stability of the UK financial sector. The predominately backward looking review enthusiastically summarizes what the average investor already knows - about the recent fragility of the UK banking sector - but performs the function admirably with a wealth of pleasing to the eye graphs and charts.

One fact of genuine interest was the similarity between global equity price declines in this recession relative to the depression that followed the 1929 stock market crash. Mirroring the exact decline seen almost 80 years ago, global equities are now 40% lower exactly 20 months after the previous bull market peak. Interestingly, the recent market rally enabled today’s market to catch up relative to the 1929 crash. Without those precious gains enjoyed in March to May, the recent bear market would have been significantly more destructive in terms of equity wealth, in those 20 months, than the same period during at the start of the depression. We have lived through historic times indeed.

The review also confirmed the reduction in market value of UK banking sector assets. In just 2 years £400bn has been lost. The survey included Banco Santander (Abbey), Barclays (BCS), HSBC (HBC), Lloyds Banking Group (LYG), Nationwide, Northern Rock (NHRKF.PK) and RBS.

The other most eye-catching data reflected the crash in corporate lending growth. 12 months ago the year-on-year growth rate peaked at an insane and now evidently unsustainable 23%. Since then the growth rate has slumped to near-zero with a total disintegration in cross-border lending.

The report progressed and stressed the ongoing need for banks to strengthen their balance sheets and the introduction of tighter capital adequacy and risk controls. I don’t think the expression “better late than never” is appropriate in this instance. Late is as unforgivable as never when you are at least partly responsible for the financial stability of the country.

Source: Bank of England Financial Stability Report 26th June 2009