BRITAIN’S bank regulator is an unlikely candidate to take a tough stand on bank funding. The Financial Services Authority (FSA) was one of the most permissive big supervisors in the world. When the crisis hit, it acted as a cheerleader for Britain’s shaky banks.
On September 17th last year it said that HBOS was “well capitalised” and funding itself “in a satisfactory way”. One day later HBOS was rescued by Lloyds TSB, and a couple of weeks after that both firms were part-nationalised. It turned out HBOS was actually nearly insolvent (the losses it has announced since are equivalent to three-quarters of its core capital then). What made it really special, though, was that it had loaned out almost twice its deposit base, creating a funding gap of almost £200 billion ($395 billion) that pretty much guaranteed its failure if wholesale borrowing markets ever dried up.
For Britain’s banks overall, loans exceed deposits by about a third, or £800 billion. With credit markets fragile, 39% of this shortfall is being met by state-guaranteed bonds or help from the Bank of England.
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