Foreign investors racing towards the exit

To see how bloated the financial system in London had become, look no further than UK bank liabilities to non residents.

Between September 1986 and March 2008, non-resident liabilities increased by just over 1000 percent. At its peak, this number had reached almost 8 trillion dollars, representing about 400 percent of GDP.

Of course, UK banks also own foreign assets. However, the stock of these assets are $633 billion less than the amount of liabilities (we will deal with this issue in a later post). The key point here is that on a net basis; UK banks owe money to people who live overseas.

How have UK non-residents responded to the credit crunch? Well, they have been pulling their cash out of our banks. Since March last year, about $1.8 trillion has left the UK banking system; a drop of about 22 percent. In other words, investors are racing towards the exit.