Ten years ago, Royal Bank of Scotland was battling with Barclays to take over a Dutch rival, ABN Amro. RBS eventually slapped £49bn on the table and won.
It was to be a transformational deal, and it certainly was – but not in any way that the boss of RBS at the time, Sir Fred Goodwin, had ever planned. Today, the Edinburgh-based bank is still displaying the damage caused by doing that deal. Still 71% owned by the taxpayer after a bailout in October 2008, the bank will once again sink to a big loss by the end of the year – its 10th consecutive year in the red.
The story of RBS shows that, even now, the global financial crisis is having a profound impact. But it also raises another issue: has enough been done to prevent a repeat of the horrors of a decade ago, which began in August 2007?
Given concern that the record low interest rates and electronic money printing that central banks resorted to in the face of the biggest recession since the 1930s are storing up problems for the future, the question is simple: has anything really changed?
Those responsible for dealing with the crisis say there is little doubt about its lingering impact. Alistair Darling, who had been chancellor for little more than a month when the markets froze in early August 2007, said the events generated a sense of injustice that is still shaping politics today.
“Very few people would have thought, back in 2007, this will provoke an economic crisis that will still be under way 10 years later. Everything that’s happening in the world just now – UK included – has to be seen in light of the backwash of what happened with the economic crash that followed the banking crash,” said Lord Darling.
Events moved swiftly 10 years ago. A month after the banks stopped lending to each other there was a run on Northern Rock – the first to affect a UK high street bank since Overend Gurney in the 1860s. A year later, Lehman Brothers collapsed in the US – triggering shockwaves through global markets. In the UK, the government bailed out RBS and Lloyds Banking Group.
No longer an MP but now a Labour peer, Darling reckons it could happen again – but not for a long time.“When the present generation is gone, the people who were in shock, a bright spark will come along and say ‘I’ve found a great way of making money’ and there’ll be nobody to say ‘the last time we did that we went bust’.”
Mervyn King, with whom Darling had a sometimes testy relationship during the crisis, agrees. Like most of those in the eye of the storm a decade ago, King thinks the financial system is in much better shape, but would be even healthier had Darling fully nationalised RBS and forced all the leading banks to take bailout cash, as happened in the US.
Even so, he said, banks were stronger and individuals now had to take greater personal responsibility for their actions.
“In that sense we are in a much better position, but the challenge for policymakers is not to worry about today but to worry about what happens in 20 years’ time, when everyone will have forgotten about this,” said Lord King. “That’s what a central bank is all about, it’s an organisation with institutional memory.”
His idea is for central banks to become a “pawnbroker for all seasons” – agreeing in advance the terms of any loans by a lender of last resort, helping to avoid the moral hazard problem where banks take risks because they know they are going to be bailed out.
A senior Bank of England official, Alex Brazier, has recently warned about banks dicing with a “spiral of complacency” in their consumer lending – when borrowing on credit cards, via unsecured loans and car loan schemes has topped the £200bn level for the first time since the crisis.
Paul Myners, a former fund manger who was City minister during the banking crisis, is concerned.
“Even a return to normal interest rates of inflation plus one or two per cent would have quite substantial impacts on a lot of borrowers ... You start to run scenarios in which interest rates are higher and the economy is not going so well and the default risk in property, consumer credit and car loans will increase dramatically,” said Lord Myners. He does not, however, think we are on the verge of another collapse.
But he does believe there should be more scrutiny of shadow banking – where fund managers, insurance companies and hedge funds conduct bank-like activities with less regulation.
Adair Turner, who became chairman of the Financial Services Authority in the month that Lehman Brothers went bust, worries that the complex, off-balance-sheet financial instruments that dominated the 2007 crisis – such as special investment vehicles (SIV) – have now become a feature of the financial regime in China, the world’s second biggest economy.
Lord Turner reckons the authorities in Beijing could contain a financial crisis – but the inevitable slowdown in the Chinese economy that would follow would prove costly to the rest of the world.
But he also believes that after 10 years of record stimulus – low interest rates and electronic money printing through quantitative easing – the world may be ill equipped to cope with another recession. “The big thing sitting behind the global economy is even, after years and years of very low and even negative interest rates, all we are getting to is barely adequate growth rates and inflation still below target. So if in that environment you have a significant downward shock, what do the central banks do next?”
After the crisis, the FSA was shut down in a regulatory overhaul . The Bank of England was handed back powers to oversee the biggest lenders and a new regulator, the Financial Conduct Authority (FCA), was set up to monitor how financial firms behaved. There was a big push to force all the strategically important global banks to increase the amount of capital they held against possible losses.
Turner, who chaired the now defunct FSA until 2013, said: “I think the financial system is now much more resilient than what it was in 2007-08.”
Andrew Bailey, who now runs the FCA, was at the Bank of England during the crisis. He also cites the side-effects of a prolonged period of low interest rates. On Thursday, the Bank of England left interest rates unchanged at 0.25%.
“If we put Brexit to one side, then the impact of sustained low and negative real interest rates is the biggest issue we face,” said Bailey, pointing to research by the Institute for Fiscal Studies showing the gap between young people and the older generation.
Darling points to the social and political impact of the years following the crisis. “If you look at the politics that have seen Trump elected, the politics in the UK today, of Brexit, a lot of it has got to do with the backwash of that time, where people have seen their incomes squeezed, if not reduced. People are worried about the security of employment.”
The consequence of the credit crunch and the global financial crisis, he concludes, is “ a millennial generation who are now poorer than the generation which came before them”.
This article was written by Larry Elliott and Jill Treanor, for theguardian.com on Friday 4th August 2017 15.55 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010