The UK banking system was badly shaken by the financial crisis, which, by spreading to the real economy, led to a historic decline in GDP of 4.9% in volume in 2009. This resulted in steep losses and impairments which, from the beginning of the crisis to the end of May 2012, totalled 135.8 billion pounds. Measured as a percentage of GDP, the losses of UK banks (9.5%) place them right after the Swiss (13.9%) and Irish (10.1%) banks, on the one hand, but far ahead of US (5.3%), German (3.4%) and French (2.3%) institutions, on the other.
Government responses to the crisis have helped to improve the overall solvency of the banking sector. However, the consolidation of their financial condition since 2010 has not lessened the persistent duality between internationally diversified institutions and those rooted in their domestic market and therefore more exposed to developments in the domestic economy. The cost of plans to support the banking sector has led governments to launch a comprehensive effort aimed at designing a new banking supervision architecture and tightening the national regulatory framework.
The UK is once again in recession since the fourth quarter of 2011. On our assumptions of real growth of 1.0% and 2.0% for 2012 and 2013, respectively, GDP is not expected to recover to its pre-crisis level before the end of 2013. The economic environment is still weak (for instance, the unemployment rate stood at 8.4% in the fourth quarter of 2011, and capital expenditure declined by 1.7% in volume in 2011) and there is a risk that further corrections in the residential property market could affect the results of UK banks to some degree.
Massive government recapitalisation since the crisis
The UK banks were not all hit to the same extent by the financial crisis. While the most internationally diversified banks (HSBC, Barclays and Standard Chartered) managed to weather it fairly well, those most exposed to their domestic market (Lloyds and RBS) sustained heavy annual losses in 2008 and 2009, which were compounded by a concomitant shortage of interbank liquidity. Faced with the risk of a collapse of part of the banking system, the Bank of England and the government rolled out rescue plans articulated around three components. 1 . The first phase of intervention aimed at restoring banks' access to the interbank market by easing monetary policy and via short-term refinancing. The second measure was the creation of a virtual 'bad bank', in the form of a defeasance framework with guarantees to segregate strongly impaired banking assets (but without taking them off bank balance sheets). The third form of intervention included cash injections and the acquisition by the government of stakes in the most vulnerable institutions (RBS, Lloyds and Northern Rock) via the public entity UKFI2, leading to the nationalisation and/or partial ownership of the share capital of many banks.
Government responses to the crisis have helped to improve the overall solvency of the banking sector. However, the consolidation of their financial condition since 2010 has not lessened the persistent duality between internationally diversified institutions and those rooted in their domestic market and therefore more exposed to developments in the domestic economy. The cost of plans to support the banking sector has led governments to launch a comprehensive effort aimed at designing a new banking supervision architecture and tightening the national regulatory framework.
The UK is once again in recession since the fourth quarter of 2011. On our assumptions of real growth of 1.0% and 2.0% for 2012 and 2013, respectively, GDP is not expected to recover to its pre-crisis level before the end of 2013. The economic environment is still weak (for instance, the unemployment rate stood at 8.4% in the fourth quarter of 2011, and capital expenditure declined by 1.7% in volume in 2011) and there is a risk that further corrections in the residential property market could affect the results of UK banks to some degree.
A significant cost to the UK budget
The government intervened massively by injecting capital into the banks that were hit hardest by the crisis. This enabled all institutions to pass the stress tests conducted by the FSA and the EBA in 2011. However, the government's support has put a strain on UK public finances.Massive government recapitalisation since the crisis
The UK banks were not all hit to the same extent by the financial crisis. While the most internationally diversified banks (HSBC, Barclays and Standard Chartered) managed to weather it fairly well, those most exposed to their domestic market (Lloyds and RBS) sustained heavy annual losses in 2008 and 2009, which were compounded by a concomitant shortage of interbank liquidity. Faced with the risk of a collapse of part of the banking system, the Bank of England and the government rolled out rescue plans articulated around three components. 1 . The first phase of intervention aimed at restoring banks' access to the interbank market by easing monetary policy and via short-term refinancing. The second measure was the creation of a virtual 'bad bank', in the form of a defeasance framework with guarantees to segregate strongly impaired banking assets (but without taking them off bank balance sheets). The third form of intervention included cash injections and the acquisition by the government of stakes in the most vulnerable institutions (RBS, Lloyds and Northern Rock) via the public entity UKFI2, leading to the nationalisation and/or partial ownership of the share capital of many banks.
