The unresolvable problem

The UK banking crisis is approaching its second birthday. Yet we are no closer to resolving the customer funding gap.

What is the customer funding gap? In the aggregate, firms and households have borrowed almost ₤800 billion more than they have in deposits. During the credit boom, this gap was filled by the wholesale lending market and securitization. Both those options are now dead, leaving a huge funding gap in its place.

Ideally, the answer would be for firms and households to borrow less and save more. Less borrowing means a recession. Moreover, borrowing would have to fall catastrophically in order for this gap to be eliminated. At the moment, the gap is well over 50 percent of GDP.

The savings option is also a non starter. In order to get people to put more money into their deposits, interest rates would have to be much higher. However, the Bank of England is now committed to a zero interest rate policy.

So, it is a problem without a solution. However, it is hard to see how the banking system could ever regain any stability with this massive mismatch between savings and loans. Therefore, the credit crunch might be with us for years.