The Banking crisis of summer 2007 began with the collapse of Northern Rock and gathered momentum when Lehmann brothers went into administration in September 2008. the true cost of the crisis will always be provisional, based on certain assumptions, but we can analyse it a number of ways.

1. Lost GDP. The output gap is the difference between actual growth and the growth of the UK economy had it continued uninterrupted on its trend line before 2008. Chief Economist of the Bank fo England Andy Haldane estimates that the output gap today may be as large as 16%. Total output loss may be as high as £2.4trillion – and of course, that figure will continue to rise as each year ticks on.
2. Public spending. Lost output and lower economic activity, together with the cost of bailout have fiscal implications. The ration fo Government debt to GDP as risen by 50% since 2008. Net government debt was £665m in 2008 and today it is £1,777m – a rise of £40,000 per household.
3. Employment. The financial sector workforce has declined from 631,000 in 2008 to 509,000 today, a fall of 20%.
4. Treasury bailout. The actual cost to the Treasury in the bailout totalled £133bn. This included £45.5bn bailing out RBS. In 2015 the Government sold £2.1bn of RBS shares back into the market and in 2018, a further £2.5bn. It’s current stake is worth £18bn. In other words, it has recouped about half the payout.

The crisis also produced a fundamental review in how the banking sector is regulated and the discretionary amounts it holds back in reserves. Those changes and their effects will be discussed in a later blog.

Peter Baron

Source: Times 8.9.18