But there’s another reason banks rushed to lend, helping to fuel what was simply another property price bubble. And it has to do with our old friend, over-regulation.
Britain branched out in the wake of the financial crisis when it decided to impose its own form of Glass-Steagall, the Great Depression-era US legislation that separated investment banking from retail and commercial banking.
Other jurisdictions in Europe considered it, but ultimately backed off, preferring to rely on higher minimum capital and liquidity requirements agreed globally, and better resolution regimes.
The UK has been an exception by specifically deciding to legislate ring-fencing, which draws a strict line between retail and wholesale banking, so that in theory one cannot bring down the other.
This particularly harsh approach was not entirely surprising; Britain had experienced a much more serious and costly banking crisis than almost anywhere else. The political class was therefore under greater pressure to minimize the risk to taxpayers by responding to concerns that some banks were too big to fail.
The purpose of ring-fencing was to isolate retail banking services, such as deposits and overdrafts, the elements of banking deemed at the time to be most critical, from non-retail activities such as retail banking. investment and international banking.
Given the scale of the damage inflicted by the global financial crisis, this approach seemed reasonable enough, but it turned out to be both unnecessary and very costly, as some of us warned at the time. Worse still, there is mounting evidence that it has fueled the UK economy’s reliance on steadily rising house prices. Paradoxically, ring-fencing may have made Britain’s banking system less secure, rather than more secure.