One of the more comforting aspects of the ongoing crisis in the UK economy is that the problems are not caused by its banks. On its own, this makes for a pleasant change. And while the nature of the gilts market crash shows just how little faith markets have come to place in economic policy – hardly a sparkling backdrop for domestic lenders – there are some reasons for cautious optimism.
- Cash deposits are up
- Rising interest rates
- Balance sheet now a strength
- Can manage mortgage margins to its advantage
- Loan impairment risks are rising
While not immune from swings in gilt yields, banks’ risk-weighted capital ratios are currently at an all-time high. With liabilities heavily weighted to long-term cash deposits, they don’t need to worry about funding their balance sheets with short-term money, or – unlike some pension funds – matching long-term liabilities with similarly long duration assets. In most cases, balance sheets are now a third of their size at the height of the financial crisis, thanks to risk management taking its proper place in the system.