Ten years ago, the global financial system started to crumble. Within a year, it was on its knees. Billions of taxpayers money was used to bail-out the banks, and monetary policy changed in an unprecedented way.
On 9 August 2007, French bank BNP Paribas suspended three US subprime mortgage market funds, as demand for these complex products had completely dried up. Signs that the global financial system was creaking had appeared before this, but they were largely ignored.
A financial earthquake ensued, forcing the central banks to slash interest rates and launch quantitative easing programmes – where new money is created to buy investments like government bonds.
With interest rates at rock-bottom and QE programmes in full swing a decade later, the unconventional has become the norm.
Financial markets might be known for their short memories, but anniversaries are time for reflection. I’ve found it a fascinating topic of conversation over the last few months; whether I’m at work events talking about the robustness of banks, chatting to friends about our new standing of living, or talking to my husband about rising levels of personal debt over a glass of wine.
There are benefits to borrowing; without it my husband and I wouldn’t own our family home and our children probably wouldn’t go to university when that time does come.
A decade of cheap money has been great for borrowers, but tough on savers – especially as inflation outstrips the returns offered on saving accounts and eats into the purchasing power of cash.
As wage growth isn’t keeping up with inflation, Brits are having to plug this gap in some way. Up to 8.8 million Brits are taking out loans to pay for essential household bills, debt charities have warned.
Consumer debt has also surged above £200 billion for the first time since the financial crisis. Car finance is the fastest-growing segment of this market, with the amount loaned jumping 15% in the year to May 20171.
Banks more robust
After a decade of getting their house in order, banks are much more robust. They’ve got more capital in reserve and have to keep to stricter regulations on funding and liquidity. Defaults on loans are also low.
Still, the Bank of England has told high street banks to ring fence an extra £11.4 billion of extra capital over the next 18 months2, as the UK’s debt binge puts it on track to reach a record high next year3.
Governor Mark Carney has also brought forward the part of the annual bank stress tests that look at exposure to consume credit by two months, and financial regulatory heavyweights are publishing new guidelines on how lenders should treat borrowers.
When will the Bank of England raise interest rates?
The Bank of England is in a dilemma. It knows it needs to normalise monetary policy, but an interest hike could cause a lot of pain for borrowers, with loan repayments getting much more expensive.
Brits will have two options; spend less or default on their loan. The first scenario is bad for the economy, the second is bad for banks.
The transition to normalise monetary policy will take time and patience. Carney isn’t going to rush something so sensitive in an era dogged by uncertainty. With their eyes glued to key economic numbers, central banks will ensure they don’t take the jump in unison.
Whilst you may be feeling the consumer squeeze, it’s important you take the time to understand your financial situation and ask yourself the tricky questions; what are you saving for? How much money do you have? How much debt do you have? Could you be saving more?
If you can, it’s worth putting more away today to prepare your family for a hike in interest rates later down the road.
1 Financial Times, How Britons are racking up personal debt, June 2017
2 The Guardian, UK banks ordered to hold more capital, June 2017
3 The Telegraph, Household debt to hit record high, May 2017