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Staggering: look at the size of UK bank debt


12:56 pm - December 19th 2011

by Sunny Hundal    


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The total level of UK debt is now nearly 950% of our GDP.

And most of it? Financial debt accumulated by the banks. The UK’s debt problem is still very much a bank debt problem, not a government debt problem

(via ZeroHedge)

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


1. Alex MacDonald

How much of that debt had been used for payments to the Tory party I wonder? No wonder its us who have to tighten our belts…

My word, that’s just amazing!

Place which hosts the international financial markets has lots of banks with lots of liabilities.

Who could possibly have thought that such a thing could happen?

“And most of it? Financial debt accumulated by the banks. The UK’s debt problem is still very much a bank debt problem, not a government debt problem”

Could you just enlighten us on why it becomes the UK’s debt problem? We’ve not done the grossly stupid thing that Ireland did, which is to guarantee all that debt.

So why is it a problem?

Erm… you do know what a bank is don’t you? It’s an institution that borrows short and lends long. Where would the world’s biggest financial centre be? Oh right, that’s London.

Can you see any connection between the above and why your article is highly misleading?

@Falco. What you say would be true if it were not for the fact that in much of the mainstream reporting the debt is conflated. It is described as debt of the country, not separated in this way. Since it is asserted that the banks cannot be allowed to fail there is some reason for that: their debts become a national problem if we allow that to happen: as the uk has done with “bail outs” even though they did not go so far as the Irish.

You seem to gloss over the fact that these banks are insolvent: but there would be no need for bailouts or QE if that was not the case. Since the ordinary citizenry are being impoverished in the name of dealing with the financial crisis it is helpful to see where the problem actually lies

“We’ve not done the grossly stupid thing that Ireland did, which is to guarantee all that debt.”

In the event of a big crisis politicians tend to panic and do stupid things, so it isn’t that far fetched to see a future chancellor, particularly one who was weak, doing exactly that in a moment of panic.

We’ve not done the grossly stupid thing that Ireland did, which is to guarantee all that debt.

So I’m assuming you think if those banks fail, it’ll have no knock-on effect on the rest of the economy?

So I’m assuming you think if those banks fail, it’ll have no knock-on effect on the rest of the economy?

Why would you assume that? And more importantly, why would you assume that I think that?

Banks falling over is a very bad idea indeed. But that’s nothing to do with how large they are.

For example, included in that number for UK bank debt is the money that HSBC lends out in Hong Kong, funded from deposits made in Hong Kong. It’s the total debts of all UK domiciled banks. Nothing to do with the amount of bank debt in the UK economy.

“You seem to gloss over the fact that these banks are insolvent”

And which banks are insolvent? A couple were, RBS and HBOS, Northern etc. But which ones are now? Which banks have liabilities larger than assets plus capital?

You really should tell us you know, as it’s highly illegal that they are still trading if they are insolvent.

Although bank debt is high – worryingly so – that does not mean that government debt isn’t a problem. There are wider issues to consider before making such a broad statement.

For example, how much of the bank debt is bad debt, and how much is planned to be repaid over an agreed time frame?

Banks do something that governments rarely do – they lend to invest. Much of the government debt that was built up over the past couple of decades was less about investing, and more to do with covering day to day running costs.

In that sense, government debt is worse than bank debt as there is no long term strategy to pay it off.

Even the Tories are not planning to pay off the debt, they also want it to keep rising, just rising slower than Labour.

I also note that private company debt has to include pension liabilities – something which the government is rather oddly not required to cost into its liabilities.

Add that into the equation and see how bad the government (aka, taxpayer) debt problems are.

We will find out when they are required to publish their leverage figures etc in 2013, I hope. But if they are not insolvent we can presumably look forward to not bailing them out any more: and to them repaying all of the bail out money and QE already committed. Next Tuesday, shall we say? They are not required to repay the QE, I gather: but they should do so anyway, what with them being solvent and us not 🙂

“They are not required to repay the QE, I gather: but they should do so anyway,”

Eh? What?

QE was used to buy gilts. That is, the Bank of England printed money which was then used to buy government bonds.

When QE is reversed, as it will be, the BoE will sell those government bonds and will collect the money. Almost none of which either went to the banks or will come back from the banks.

Hate to say it, but I completely agree with Tim Worstall on this.

It is due to London’s role as an international financial centre and, if the assets on which the liabilities are secured go bad, the UK taxpayer will not pay a penny

Hmm. Since the aim was to free up lending for the real economy how could that have worked if they did not buy the gilts from the banks? Genuine question.

As I see it the idea was for the banks to use the money to help business by reinstating credit. Business says they have not used it that way. They seem to have retained it instead. So it seems to me to be a bit of a one way street. What happens if we just take the money off them and give them their assets back at the price we paid: then we could use the money to do what we actually want to do directly. A nationalised bank can be the channel and fortunately we have got one of those…

“Since the aim was to free up lending for the real economy how could that have worked if they did not buy the gilts from the banks? Genuine question. ”

That wasn’t the aim.

The aim was to lower long term interest rates. This will make business more likely to invest the cash they already have (the cash surplus in corporates is the largest it has every boon right now) and people less likely to save: which is what we want, as we would prefer people spend right now.

So, how do you lower long term interest rates? You buy lots of long term bonds. Bonds rise in price and as the yield is the inverse of the price this drives yields, and thus interest rates, down.

The vast majority of gilts purchased were not purchased from banks. They were bought *through* banks, yes, but that’s because banks are the gilts dealers. The actual sellers were the insurance companies, pension funds and so on.

In fact, I think I’ve seen numbers (cannot remember where or even that I’m quite correct in the memory) that banks had more gilts at the end of QE than they had at the beginning.

14. Luis Enrique

this is because UK banks are global. Your current account and savings are a bank’s debt. If people deposit money in an overseas branch of a UK bank, that is showing up in this graph as “UK bank debt”. A bank’s debts should be covered by its assets – this chart could equally show bank assets, it would have more or less the same information – the only way in which the absolute size of the debt matters if the assets fall in value leaving liabilities uncovered, requiring a bailout, when the size relative to host nation GDP may become important. The (main) way to avoid that is to raise capital buffers – something Vickers is doing but everybody around here seems to pooh pooh.

If you wish to reduce the size of UK bank debts you can either

1. recapitalise them, so that they raise new equity and pay off some debts. That means raising capital buffers, so I fail to understand how people can express concern over the size of UK bank debts yet show so little interest in raising capital buffers. (retaining more earnings by cutting dividends and bonuses, helped by making big profits on the Sarkozy carry trade could also help here)
2. have them shrink their assets – that means stop lending so much to businesses and households. This is in fact what is happening and is a big problem – read this

afaik 1 or 2 are you only options

15. Luis Enrique

or you could just ask the UK banks to sell bits of themselves to foreigners. that would reduce the size of UK banks (and their debts).

this is because UK banks are global. Your current account and savings are a bank’s debt.

But that’s not a good enough argument, is it?

It means your economy is then more reliant on City tax revenues than should be the case.

It also means your real economy more exposed to banking failure when/if it happens.

Also means taxpayers more likely to be brought in when bank needs to be bailed out if it goes under.

Yes?

Gross debt fetish is just the love of big numbers. Typical thing for paranoid drama queens like ZeroHedge to rant about.

12. Fiona

” Hmm. Since the aim was to free up lending for the real economy how could that have worked if they did not buy the gilts from the banks? Genuine question.

As I see it the idea was for the banks to use the money to help business by reinstating credit. ”

Well you see it wrong. QE has nothing to do with expanding credit as a primary objective. The purpose of QE is for the monetary policy committee to fulfill their remit. There must be enough money in the system for the MPC to fulfill their remit or deflation will prevent them achieving their remit. Any expansion of bank lending would be a second order effect. The BoE specifically avoid buying assets from banks in QE. In fact, during the first round of QE in 2009, the banks only had £25 billion of government securities on their books. Therefore, buying £200 billion securities from them would have been impossible. The BoE, buy from non-banks such as pension funds and insurance companies. To pay for the purchase they credit the sellers bank, reserve account at the BoE. The only effect for the bank is that their reserves held at the BoE increase. The effect for the non-bank seller is that there is more money in the system and they need to rebalance their portfolio of assets. Therefore, they go and buy more corporate bonds and equities. That reduces the spread between corporate bonds and gilts making it easier and cheaper for corporates to borrow from capital markets. Any expansion of commercial bank credit would be second order through an improving economic outlook. The banks lend based on their capital, not their reserves. Stabilising or rising asset prices improves their capital and falling asset prices deteriorates bank capital.

18. Luis Enrique

Sunny,

well it’s not such much an “argument” as a fact. If you want an argument for (or against) the UK having such big banks, that’s another matter. Yes, the size of banks relative to the host economy can be a problem if they need bailing out. If you want to shrink UK banking sector, well fine – easiest route is to sell them to foreigners (presuming you don’t want just to ask them to stop making loans, another way to shrink them). Or, as I wrote, keep them the same size but change the debt-equity mix on the liabillity side of their balance sheets.

being “too reliant” on taxes from banks is an interesting question – that only becomes a problem if something happens to hit the banks, so that those taxes you rely on are reduced, leaving you with a problem. Otherwise having a big tax generator is a good thing. If you want to shrink the size of UK banks, that would also reduce the quantity of taxes you get from them, doesn’t that also leave you with a short fall?

19. Luis Enrique

[one thing I don’t understand is the importance of banks both borrowing from and lending to other banks – I don’t know its quantitative importance, or how important it is for system stability, or even why you would want to do that in any significant way]

20. Luis Enrique

(I should add, another sense in which we may be too reliant on tax revenues from City is that if it gives bankers undue political influence)

So, the point of this article is to apportion blame to the bankers, over government spending?

Wasn’t the bank bail out part of government spending? Who gave the banks all that M3, to save their own political careers? Who were the cowards who wouldn’t let a free market operate?

22. Frances_coppola

There are lots of questions this chart doesn’t answer.

1) Does the figure for total bank debt include the amounts that UK banks owe to each other? If it does then the figure is grossed up and therefore too high. Inter-bank balances should be netted.

2) Is the central bank included in total bank debt? If it is, then QE is already built into the figures. If it isn’t included, then the total figure for UK debt is wrong. Showing the liabilities of UK banks (including cross-border ones) but excluding the central bank’s liabilities gives an inaccurate view of the UK’s finances.

3) If the central bank is included, then settlement balances between central bank and commercial banks also should be netted (and will therefore disappear). If the central bank is not included then these show as bank debt, so the figure is again too high.

4) Does the figure for UK government debt include the anticipated cost of financial interventions – which is a contingent liability so arguably should not be included?

There are lots more questions I could ask. Unless there is an explanation somewhere of exactly what this chart includes and how the figures are calculated, it is meaningless.

It is aIso very misleading to state total liabilities without considering risk. It is not the absolute size of the total liability base that is the problem. It is the quality of the matching assets. A very large balance sheet made up almost entirely of high-quality debt – say domestic mortgages to people with excellent credit records and LTV of 70% or less – is much less likely to fail than a much smaller balance sheet made up mostly of subprime and unsecured loans. (And before you all shout at me about mortgages, Northern Rock’s very large balance sheet had substantial amounts of subprime and effectively unsecured loans – according to the NAO report the default rate on its TOGETHER subprime mortgages during the five months leading up to its nationalisation was 75%.)

This chart lumps in together all forms of debt, irrespective of its risk. Debt/GDP ratio is the public equivalent of the capital/RWA ratio for a bank – it is a measure of the ability of the country to absorb losses. But bank capital allocations take into account the risk of the matching assets, which this doesn’t. It is simply silly to gross up all forms of financial debt, however secure, and go “shock, horror, look how much they owe, they are all going to fail, we will go bust”. No they aren’t, and we won’t.

There are a number of people in the US demonising the UK at the moment – suggesting that its debt is unsustainable and the City is a hotbed of fraud. I think this is because the ratings agencies are starting to look at the UK now and there are vested interests who would gain from a downgrade. And no doubt the US’s own downgrade still rankles. And there is an election coming up, so anything to distract attention from the US’s own debt and fraud problems is helpful to the present administration. That’s not to say the UK doesn’t have problems and won’t be downgraded at some point. But making things look bad by issuing pretty charts with unexplained and possibly grossed-up figures is pure politics.

16 Sunny
“Also means taxpayers more likely to be brought in when bank needs to be bailed out if it goes under.”

The chart also shows domestic debt at about 100% of GDP; non-financial debt is about 100% of GDP, and Govt debt at 100% of GDP, so if the banks do start failing, there is not a room to deal with – especially if some of this domestic debt is owed to banks.


Reactions: Twitter, blogs
  1. Rikbut

    Staggering: look at the size of UK bank debt | Liberal Conspiracy http://t.co/J8uL4NK2 via @libcon

  2. mao zedong

    #UK : Staggering: look at the size of UK bank debt http://t.co/1SuUVa5R

  3. Bank of Ideas

    FYI : @bankofideas http://t.co/iq2pXuR6 via @libcon

  4. Dr Hemp

    RT @catvincent: Staggering: look at the size of UK bank debt http://t.co/fWTPKsA2 950% of GDP //// should be funny. But its not.

  5. Dave Robinson

    The total size of UK debt now approaching 950% of UK national income. Most of it is bank debt http://t.co/fsFm5JRl

  6. Robert CP

    Staggering: look at the size of UK bank debt http://t.co/3Q2nyNhn

  7. Alex Braithwaite

    Staggering: look at the size of UK bank debt | Liberal Conspiracy http://t.co/CZaOTCFx via @libcon

  8. AAMC

    Interesting chart, NZ debt private not public problem, Austerity ideological Swindle! http://t.co/zBAaWHxs #nzpol

  9. Patrick Walsh

    Staggering: look at the size of UK bank debt – http://t.co/YHOvfuy7

  10. Jason Paul Grant

    http://liberalconspiracy.org/2011/12/19/staggering-look-at-the-size-of-uk-bank-debt/

  11. Dominic Ellison

    Staggering: look at the size of UK bank debt http://t.co/nQIVOTU5

  12. Link Loving 20.12.11 « Casper ter Kuile

    […] All this national debt we hear about – what is it? Turns out it’s overwhelmingly financial debt. Sunny Hundal. […]

  13. Frances Coppola

    Staggering: look at the size of UK bank debt | Liberal Conspiracy http://t.co/hKvoGIHe via @libcon << A very silly chart. Comments good

  14. Daddy Timmers

    Staggering: look at the size of UK bank debt | Liberal Conspiracy http://t.co/hKvoGIHe via @libcon << A very silly chart. Comments good

  15. cllrdarrenfower

    TOTAL level of UK debt is now nearly 950% of our GDP! Check out the latest graph on size of UK bank debt – Click: http://t.co/mkToGqpE

  16. ? True veggie ? #EA

    TOTAL level of UK debt is now nearly 950% of our GDP! Check out the latest graph on size of UK bank debt – Click: http://t.co/mkToGqpE

  17. Josep Soler-Albertí

    TOTAL level of UK debt is now nearly 950% of our GDP! Check out the latest graph on size of UK bank debt – Click: http://t.co/mkToGqpE

  18. Josep Soler, IEF

    "The total level of UK debt is now nearly 950% of our GDP." by Liberal conspirancy http://t.co/dFHbuEiX

  19. Alicia González

    "The total level of UK debt is now nearly 950% of our GDP." by Liberal conspirancy http://t.co/dFHbuEiX

  20. Antonio Borras Aloma

    TOTAL level of UK debt is now nearly 950% of our GDP! Check out the latest graph on size of UK bank debt – Click: http://t.co/mkToGqpE

  21. Peter Huw Farmer

    @fluffkin
    Sit down.
    Take a deep breath.
    Brace yourself…..
    http://t.co/YieVQw01

  22. FacePalm

    @MinkseyP_727 @fauxpaschick You'll like this .. http://t.co/gZwlY6ge Next time you hear "60% of GDP is sustainable" have a grim smile.

  23. michael emonds

    @EtonOldBoys The UK actually has the highest debt of GDP if you take private debt PFI's etc : http://t.co/LYM1Dzgv





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