Speaking at a Professional Liverpool dinner yesterday, Bank of England executive director Andrew Haldane warned that the UK is suffering from a debt overhang, or “hangover”, thanks to years of lending excess. He says banks must work fast to cure this hangover or they will create pain for UK borrowers.
Haldane says: “Having fallen off a cliff, the bounce in financial markets has been more startled bunny than dead cat. But the lasting legacy of this crisis is too much debt held by too many sectors against too little capital.”
Haldane says the debt hangover will slow activity in the period ahead and if it is severe enough, it may diminish incentives to work and invest. This is illustrated in data from Moody’s: UK banks need to refinance £615bn of debt between now and 2014. Haldane says: “As hangovers go, this one is large and will linger”.
He also warns that, as well as trying to reduce private debt banks must also work harder to reduce the public debt they have incurred: “Extraordinary policy measures have acted like a painkiller for debt problems. But painkillers offer only temporary relief. Loans from government to repair balance withdrawn.”
Haldane says the key to reducing outgoings is to not only reduce remuneration bills but also reduce dividends – he calculates that if UK banks had reduced dividend payouts ratios by a third in the last decade, trimmed staff payout by 10 per cent and restricted from paying dividends in the event of an annual loss, £85bn of extra capital would have been generated.
He says: “Among global banks, net income fell by over 20 per cent between 2006 and 2007. Over the same period, dividends grew by 20 per cent. In 2008, global banks made losses totaling £37bn ($60bn), but on average still made dividend payouts of over £37bn.
“Three modest changes in payout behaviour would have generated more capital than was supplied by the UK government during the crisis.”