UK banking sector - 5.3 times GDP

The UK banking system is a wonder to behold. It is a veritable monster. However, it is also a stricken giant, stumbling around; and if it falls, it threatens to destroy the UK economy.

As of December 2008, total assets of UK deposit taking banks was ₤7.4 trillion - which is about 5.3 times UK annual output. That is a consolidated number; which nets out interbank lending. So, there is no double counting hidden in that grotesquely large total.

It wasn't always this way. We once had a much more modest banking system. Back in 1991, UK banks had assets totalling ₤1.2 trillion. In the intervening 18 years, the sector has grown by 501 percent. It has averaged a growth rate of almost 2.5 percent a quarter, which is around 10 percent a year.

This unprecedented and dangerous rate of growth was fueled by bad lending on a massive scale. There was little effective credit control or appraisal. Behind that 7.3 trillion number, there is a mountain of bad debts. This is why the UK government was forced to take over RBS, offer ₤500 billion of government guarantees, and is now on the verge of nationalizing Lloyds. The government is trying to hold the giant up, but its legs keep buckling.