Next month is the fifth anniversary of HSBC releasing a trading statement which on the face of it looked fairly innocuous but which contained this statement: "Deterioration in US housing markets is affecting consumer finance credit quality more broadly than hitherto and loan impairment charges are expected to remain high in these conditions. There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy."
That was the first inkling on this side of the pond that there were potential problems lying in the caravan and trailer parks of the southern United States which would inflict untold damage on sub-prime lenders who had offered their owners mortgages which they could never repay.
As the gruesome array of products such as securitisations, mortgage-backed securities and collateralised debt obligations unravelled at a bewildering rate the world's banking system was on the brink of collapse.
Two years on, by the end of 2009, the UK had been forced to bail out Royal Bank of Scotland and Lloyds to the tune of £65bn, nationalise three former building societies – Northern Rock, Bradford & Bingley and Alliance and Leicester – and Barclays had turned to Middle Eastern investors for a £7bn cash injection.
Thousands of bank staff from cashiers to chairmen and chief executives have lost their jobs. And Sir Fred Goodwin, the architect of RBS's downfall, last year lost his knighthood.
Banks have been forced to slash their balance sheets, cut back their riskiest assets and even reduce their top bankers' pay. But even now the country's most senior banker does not believe the banks have done enough.
Sir Mervyn King, the Governor of the Bank of the Bank of England for another eight months, this week said: "Just as in 2008, there is a deep reluctance to admit the extent of the undercapitalisation of the banking system in many parts of the industrialised world." He added: "I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems.
"Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery. In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake."
That is bad news for shareholders in banks including the Government with its 82 per cent holding in RBS and 40 per cent of Lloyds. Little wonder that Jim O'Neill, chief executive of the body which looks after those stakes, UKFI, told MPs on Tuesday that there was little chance of any kind of share sale any time soon. He said: "A lot needs to change before full value can be recognised."
Gary Greenwood, banking analyst at Shore Capital, rates only one of the big four listed UK banks as a "buy" (Lloyds) and the rest as mere "holds". Ian Gordon of Investec is a seller of Lloyds and a buyer only of Barclays among high street banks. His view on RBS is even gloomier: "Chairman Sir Philip Hampton hopes to see a sell-down of UKFI's stake commence before the election. It is a worthy aspiration, but one unlikely to be realised. Sell."
But if the banks have failed their shareholders it is also clear after a swath of reports ranging from Sir John Vickers' to numerous Treasury Select Committee ones that the regulators failed the banks.
With the demise of the Financial Services Authority next year regulation of banks passes to the Prudential Regulatory Authority and the Financial Conduct Authority. Both have been setting out their aims over the last two weeks. Andrew Bailey, who will head the PRA, said his goal was for the "public to put their trust in a safe and stable banking system". His regime would be more forward-looking and would not use "box ticking" and "light touch" regulation for the banks.
Martin Wheatley, whose FCA will regulate financial products sold in both the wholesale and retail markets, told banks and City firms he will come down on them much faster if they misbehave. Paul Tucker, favourite to be the next Governor of the Bank of England, warned bankers that he expects them to rein in extravagant cash bonuses and adopt pay systems "which would make it less easy to get rich quick irrespective of the quality of business transacted".
The Financial Services Bill, currently going through Parliament, addresses many of the recent scandals and disasters in banking. It will set up the formal structure for ring-fencing the retail arms of banks from their more risky investment banking business. It will also adopt Mr Wheatley's advice on a complete overhaul of Libor following the rigging scandal which cost Barclays £290m and could cost RBS even more.
Tony Anderson, a partner in the banking team at the law firm Pinsent Masons, said: "It is key that the overhaul of Libor that is proposed is accepted by the rest of the financial markets throughout the world. Following the financial crisis we are seeing a trend towards replacing self-regulation of financial infrastructure with more formal arrangements."
That means UK banks not only have to fit into new UK laws and regulators but also work under the auspices of tighter European regulation, and eventually the global rules governing how much extra capital they must hold under Basel III.
Customers have actually seen little change. New banks like Metro have carved out tiny market shares. Virgin Money with its takeover of Northern Rock is becoming a significant player. Marks & Spencer and Tesco are treading slowly to convert their shoppers into current account customers. NBNK, which looked at building a new bank by buying branches from RBS or LLoyds, has folded its tent.
Consumer choice will be improved next year when current account portability becomes enshrined in law but the differences between what each bank offers remain frighteningly indistinguishable.
In terms of regulatory measures UK banks are indisputably safer than they were five years ago. Most of them, under the new leaderships of Stephen Hester at RBS and more recently Antony Jenkins at Barclays, are slashing back their risky investment banks and concentrating on becoming boring banks and bankers.
But the risks remain. Mis-selling PPI refunds have now topped £10bn, Libor-rigging penalties will run into hundreds of millions and money-laundering punishment in the US has only just begun. What we do not know are the other undiscovered scandals lying in the banks' deepest vaults.
Things to come: Better profits
Santander UK will today kick-off the British banks' third-quarter reporting season. It ends on 5 November with HSBC. What can we expect?
Gary Greenwood, a banking analyst at Shore Capital, is broadly predicting the banks to report better underlying profits than a year ago but will continue to have plenty of extra, below-the-line, one-off charges.
"Investment banking performance is likely to be a key driver of year-on-year profit growth, in our opinion, as recent central bank action has created a more favourable market environment, as reflected in recent trading updates from the large US banks," said Mr Greenwood.
He also believes the ability of banks to fund themselves has improved as actions taken by central banks, including the Bank of England's Funding for Lending, start to take effect. This may take time to feed through to profits, but banks like Lloyds and Royal Bank of Scotland could be the biggest beneficiaries.
Mr Greenwood is also cautious on one-off charges. He said: "Ongoing restructuring charges are likely to be a feature of RBS and Lloyds results. An additional, £700m payment protection insurance provision will impact Barclays results, and possibly those of other banks (most notably Lloyds). Other regulatory costs will also need to be absorbed, including Standard Chartered's $340m (£212m) settlement with the US authorities over the Iran scandal."
Overall, Mr Greenwood has become more bullish about UK banks, but he still recommends that investors retain neutral weightings in the shares "given the high-risk nature of the sector".Reuse content