The UK customer funding gap - ₤737 billion

In a properly functioning financial system, banks are supposed to work like dating agencies, bringing savers and investors together. Over the last decade or so, UK banks have been doing much more than matchmaking.

The chart above illustrates the extent to which banks have departed from its traditional role of intermediating between savers and investors. The customer funding gap is the difference between household loans and household deposits. Back in the early part of this decade, loans and deposits were broadly equal. Since then, the amount of household loans rapidly outstripped household deposits. By the middle of this year, the difference was about ₤737 billion, which is about 50 percent of GDP.

How did banks bridge this gap? They went to the wholesale money markets. They issued dodgy asset backed securities, with much of this funding coming from overseas.

This non-deposit bank financing has now all but dried up, which goes a long way to explaining why mortgage approvals have collapsed. It also partly explains why sterling has declined so dramatically. Foreigners are pulling their money out and as they do, sterling slides south.

Going forward, the UK customer funding gap is very likely to narrow and as it does, it will take house prices down with it. It will also lead to a sharp decline in household consumption and ultimately push the economy into a recession.