3 min read

The seven things you need to know about the Financial Stability Report

The best thing about the Bank of England’s Financial Stability Report is the brilliant charts it includes about the state of the financial system. To save you from reading the whole thing, here, in no particular order, are some of the most striking ones.

1.Things are getting (a bit) better.

The good news is that the financial system is getting a touch healthier. As you can see from the chart above, the perceived chance of a “high-impact event” in the UK banking system has fallen sharply since this time last year. And, as you can see below, the funding gap between banks’ deposits and their lending – the key metric of financial vulnerability ahead of the crisis, has narrowed to the lowest level on recent record.


2. But banks still need more capital

This is the chart from the report which is probably going to get the most attention in tomorrow’s newspapers. It shows Bank calculations that British banks may have been overstating the value of certain risky assets they hold in their balance sheets by as much as £35bn. That’s one of three elements of why the Bank believes the banks will have to raise more capital, as I write about here.

3. A fifth of commercial property loans are in negative equity

If you wanted evidence of the ill health of the commercial property market you can find it in this graph, showing just how large a proportion of commercial property loans (20%) have a loan to value ratio of over 100% – eg are in negative equity.

4. British banks are still highly exposed to the eurozone

This chart might help answer the question of why we ought to be worried about an economic crisis of any sort in the euro area. As you can see, RBS and Lloyds have tens of billions of pounds worth of exposure to Ireland; Barclays has major exposure to Spain and Italy.

5. Who has increased lending in the UK?

This chart shows you that since 2009, Barclays, HSBC and Banco Santander have both increased their lending to UK customers (the dark blue part of each bar). But this has not been not enough to offset the drop in lending by RBS and Lloyds.

6. UK households are far less indebted than other countries around Europe

It might surprise you to learn that household debt in Britain is actually lower (as a percentage of disposable income) than in many other countries around the world, including the Netherlands, Norway, Sweden and Australia. In fact, it’s barely higher than in Canada, home to the Bank’s next Governor, Mark Carney.

7. Value creation and the banking system

This chart builds on a point made by Andy Haldane a number of times: banks have not produced much, if any, extra value, set against the amount of assets they have in their balance sheets. The key thing here is to note that the x axis represents return on equity: this means that if you invested in bank shares (the pinky purple dots) you would have received a decent return between 2000 and 2011. But in comparison to assets, banks have created next to no value, while other non-bank companies (the blue dots) have created lots of value.

It underlines the point Lord Turner made a couple of years ago: a lot of what banks do is, effectively, socially useless.


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