Anyone who’s seen the 2015 film The Big Short knows that the financial crash of 2007 was a result of investment banks selling almost completely worthless financial products to millions of customers. But, ten years down the line, what are the lasting effects of the banking crisis?
What caused the crash?
In 2007, Chancellor of the Exchequer Alistair Darling had only been in the job for a matter of weeks when the Financial Times front page declared BNP Paribas, a French bank, had been forced to close two of its hedge funds. This created a domino effect as the cost of credit for all banks escalated, causing panic amongst financial markets and leading to the run on Northern Rock (the first on a UK lender in 140 years), the demise of Lehman Brothers and the bailout of RBS and Lloyds, at a cost of tens of billions of pounds to the British taxpayer.
What’s being done to prevent another crash?
The largest UK banks are now required to ring-fence their commercial operations, keeping them entirely separate from the investment side of the business, in order to protect customers’ money. You’ve probably been advised by your own bank that they’re currently working towards this, many customers won’t notice the change, but some may need to be moved to a new account number as a result. The deadline for ring-fencing is January 1st 2019, and it should prevent the need for government bailouts in any future financial crises, as well as ensuring these are fewer and less severe than the crash of 2007.
Are we safe now, ten years on?
According to the experts, we’re safer than before, but not entirely safe. Gillian Tett, US managing editor of the Financial Times and a close observer of the banking crisis, believes that whilst individual banks are more secure, the real problem is debt. “What has happened is a reliance on private debt…has been replaced by a reliance on public debt. The system as a whole is still unbalanced.”
Sir Win Bischoff, the veteran British banker who was chairman of Citigroup through the crisis and went on to be chairman of Lloyds Banking Group, believes the system is safer than before. “But ask me again in ten years’ time.”
Lord Darling is equally hesitant to assume all is well. “It’s just when you think things are fine that complacency creeps in.”