A long line of panicked Northern Rock customers queueing to withdraw cash in September 2007 became one of the most memorable images of the financial crisis in the UK.
A stream of regulation aimed at preventing a repeat of the financial crisis has since led to a clampdown on risky banking practices and a strengthening of lenders’ reserves.
Even so, some of the risky practices used by Northern Rock and other lenders have re-emerged in different guises, especially in consumer credit.
A decade on from the run on Northern Rock, the first on a British lender since 1866, these charts show the extent to which the UK banking landscape has changed.
1. Funding
The collapse of Northern Rock was sparked by a funding crisis. Rather than relying on sticky retail deposits to fund mortgages, the bank was heavily dependent on short-term finance from the wholesale markets and securities issuance.
According to Morgan Stanley Research cited by the Treasury select committee, in 2007 the average loan-to-deposit ratio of UK banks was 137 per cent. But for Northern Rock, it was 322 per cent, almost two times that of HBOS, which also later collapsed.
As at the end of 2016, RBS had a loan-to-deposit ratio of 91 per cent, Barclays 93 per cent, Lloyds 109 per cent and HSBC 68 per cent.
Before the crisis unfolded, UK banks’ short-term wholesale finance peaked at more than a quarter of total funding. That is down to 10 per cent. Northern Rock had short-term wholesale funding liabilities of about 60 per cent, more than twice the UK market average.
“It was pure liquidity that brought [Northern Rock] down, and sitting here today, all banks are now substantially funded by retail deposits,” said Ian Gordon, an analyst at Investec.
2. Mortgages
Remember Northern Rock’s flagship “Together” mortgage? It allowed buyers to borrow 125 per cent of a property’s value by stumping up a 5 per cent deposit and taking an unsecured loan of up to 30 per cent.
That kind of lending has ended, with “self-certification” loans and riskier parts of the subprime market going the same way.
According to Moneyfacts, there were 397 mortgages with a loan-to-value of 100 per cent or more in 2007, against 15 offering 100 per cent today. The average LTV has fallen from 90 per cent in 2007 to 78 per cent.
New 2014 rules require lenders to rigorously test a borrower’s affordability to prevent a return to irresponsible lending.
“Perhaps most notably, banks now have to provide advice to all who speak to them about a mortgage,” said Andrew Montlake, a broker at Coreco. “It seemed crazy that a first-time buyer could get a high loan-to-value mortgage and take out the biggest loan they are ever going to take on a property without any advice whatsoever.”
3. Consumer credit
Although banks reined in consumer lending following the financial crisis, there has been an uptick in the past few years and a return to riskier practices, such as long interest-free periods on balance-transfer credit cards.
Unsecured consumer credit has risen since 2010, with rates of growth returning to pre-crisis levels of about 10 per cent. Borrowing rose above £200bn in July for the first time since 2008, in a sign that banks are pushing more aggressively into unsecured lending to boost profits.
Although the annual growth rate of consumer credit softened to 9.8 per cent in July, the lowest since April 2016, it has risen for the past 56 consecutive months.
There has been growing concern about consumer credit growth in the UK, with the Bank of England recently warning that long interest-free periods on credit cards and an increase in loan limits are contributing to the fast rate of expansion. The BoE has also raised concerns that lending standards have become too lax.
4. Capital
Banks were forced to increase their capital buffers following the financial crisis after mounting credit losses eroded their reserves.
The UK’s largest four banks — HSBC, Lloyds, RBS and Barclays — launched rights issues in 2008-2009 to boost their capital base.
UK banks have raised more than £130bn in additional capital since 2007. As a result, their balance sheets have strengthened, with the average core tier-one ratio, a measure of capital to risk weighted assets, increasing three-fold to 14.3 per cent over the period.
The Bank of England told lenders in June that they would need to build a special buffer worth £11.4bn over the next 18 months as it tried to make banks more resilient to the risk posed by mounting consumer debt.
5. Savers’ compensation
Part of the reason depositors queued around the block to withdraw their cash from Northern Rock was that in 2007 the UK’s Financial Services Compensation Scheme only protected up to £31,700 if an institution collapsed.
After the run, the government increased the level of protection to £35,000.
Peter Sleep, a fund manager at Seven Investment Management said the run on Northern Rock “demonstrated that there was no real safety net”. He said: “As soon as the Bank of England stepped up in 2007 and said it would back depositors, the queues disappeared”.
In October 2008, the government was forced to inject £37bn into RBS, Lloyds and HBOS to shore up their balance sheets and prevent a systemic failure of the banking system. Since then, the limit has been increased a few times and now sits at £85,000.
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