Although Britain’s banking crisis received wide coverage in the media, this did not provide the public with any clearly structured account of its financial events and left most people feeling that they had no clear understanding of what had happened. To this extent the media failed in their duty to educate public opinion.
The balance sheet approach set out here provides a clear and consistent framework that is essential for any real understanding of the crisis: how some banks came to face imminent failure and the operations by the Bank of England and the government that saved them.
This approach is used to give structure to a brief account of the main financial events affecting the banks which had to be rescued. Detail is limited by the lack of information.
The immediate sources of Britain’s banking crisis were:
1. the failure of managements in the banks concerned, whose competition for growth, particularly growth by acquisition, blinded them to the fact that they were acquiring large amounts of assets of declining quality, with growing dangers to their solvency and liquidity.
2. reliance upon risk-sensitive inter-bank borrowing, rather than more stable retail deposits, to fund this rapid growth in assets.
3. the failure of light touch bank regulation, which can be traced back to Greenspan in the USA and was introduced into Britain by Gordon Brown when Chancellor of the Exchequer. The Financial Services Authority (FSA) implemented light touch regulation and this left the British banking system without any effective supervision.
4. the failure of those managing the FSA, who should have had the broad knowledge and experience of the banking system and its history of occasional upsets and crises, to question publicly the adequacy of the light touch regulation imposed upon them by a politician.
5. the failure of effective due diligence in takeovers; this played a major role in the crisis.
Following the crisis the most significant reform has been in the FSA, which has abandoned light touch regulation and reverted to something resembling the type of supervision exercised earlier by the Bank of England (which is now about to be given back responsibility in this field). This new regime promises to be effective.
There have been many suggestions for reform; some leading ones are mentioned and several are criticized.
The question of how to deal with a sectoral problem, such as Britain’s housing boom, remains unresolved.
