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Home > Capital Markets Best Practice > The Crash and the Banking Sector—The Road to Recovery

Capital Markets Best Practice

The Crash and the Banking Sector—The Road to Recovery

by Angela Knight

Executive Summary

The British Bankers’ Association has been heavily involved in many of the UK’s landmark discussions on the financial crisis. This article explains the BBA’s perspective on how the crisis came about, the response of the markets, how the financial regulation of the future might look, and sounds a warning that, for all its benefits, globalization comes at a price. The article looks at:

  • The availability of cheap credit, and its impact on fueling the bubble;

  • Globalization and its impact on contagion;

  • The disappearance of non banks and non-UK lenders from the market;

  • The shape of regulation to come.


With the empowering gift of hindsight, there were some telling signs leading to the financial crisis, which has now become a global recession. Global imbalances had been growing for a decade. The United Kingdom and other Western economies imported raw materials, manufactured goods, gas, and oil from the East, exported their inflation, and, in the case of the United Kingdom, sought to fill the balance of payments deficit in tangible goods through financial services. These activities increased the current account deficits in countries such as the United Kingdom, United States, Spain, and other European countries, and increased the surpluses in Japan, China, and other Asian economies. The imbalance laid the foundations for the credit crunch.

Interest rates were low and investors wanted a better return. Credit was freely available, which fueled the property price boom. Innovation in financial services took place to feed the demand for credit, on the one hand, and a better return for investors on the other. Securitization became complex securitizations; leverage resulted in apparently better returns. Markets did what they always do, becoming overoptimistic on the up and overpessimistic on the down. Bubbles developed most noticeably in raw materials, energy, and housing.

A Harsh Lesson on Globalization

For years, we have also lived with a number of unchallenged assumptions: that globalization is only a force for good; that liberalization of credit brings broad and sustainable benefits to companies and individuals; and that the only real monetary policy tool needed is the control of an inflation target.

It was assumed that if a bubble forms, authorities know what to do about it and can mop it up quickly if it bursts. Many assumed that new regulatory arrangements plus more sophistication generally would provide protection. And, of course, many assumed that economies had come to the end of boom and bust. The experiences of a global recession show that these assumptions are flawed. As we all know, hindsight is a great teacher.

The Market Response—the Statistics Tell the Story

In responding to the situation, the industry and authorities have to deal with many issues. One issue gaining immediate attention is lending. The statistics here tell an interesting story.

Eighteen months ago, there were more than 100 mortgage lenders operating in the United Kingdom. Now there are just the five main High Street banks, plus two or three building societies. On average, throughout 2008, major High Street banks each month wrote some 50,000 remortgages, plus 26,000 new mortgages.

Then, in December 2008, demand for mortgages fell substantially. Figures show that the demand by individuals for all types of credit has fallen, and savings have started to rise. At the same time, lending to small firms by the major banks remains either constant or is increasing. Deposits by these companies have also remained constant.

The problem is that many non-UK banks and non-bank lenders have, like mortgage providers, disappeared from the market, taking with them a sizeable chunk of small business lending capacity. Treasury says the gap could be more than £100 billion, which major banks are now being asked to pick up.

Bank of England statistics also show that UK savings rates fell steeply from 2005, leaving a gap between demand for credit and supply of something like £300 billion, which was largely filled by the wholesale market. The whole dynamics of credit supply and demand have changed, and reaching a solution will not be easy.

It will also take time and a great deal of effort to rebuild confidence. As the voice of the industry, we acknowledge that not all banks have been appropriately vigilant in managing risk. What has happened should not have happened. The industry expresses its regret and has apologized. It looks forward to the apologies of other contributors, including from rating agencies, governments, regulators, institutional investors, central banks, economists, and commentators. They, too, are part of all this.

As the world responds to the turmoil, all sectors and parties need to work together; global challenges demand global responses. We have seen major economies working together to restore stability to markets. Policy makers must now avoid piecemeal regional or national responses in regulation and policy, which could distort international trade and undercut its benefits.

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Further reading



  • Financial Services Authority, contains a number of relevant documents:

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