Transcription
In 2007, thousands queued outside Northern Rock to pull their savings out. Hundreds of thousands of UK jobs, including tens of thousands in the city, ultimately disappeared. A year later, Lehman Brothers collapsed and millions lost their jobs worldwide as the global recession deepened.
But something has quietly changed since. The capital buffers that banks were forced to build after 2008 are being loosened again. And that's in the UK and in the US at the same time. So, this isn't about me telling you that your current account is about to vanish. It's all about the risk that those buffers were holding back, sliding into a corner of finance that regulators admit they can't even measure. So, let's follow that risk to learn more about what's going on.
And here's the part that most people get wrong about Northern Rock. The cues that you remember, the ones that you saw in every news bulletin, weren't the run on the bank. They actually formed after the Bank of England stepped in to rescue Northern Rock. The real run had already happened. And that's with almost no media coverage. And it happened in the wholesale funding market because Northern Rock didn't really run on your deposits at all. By the summer of 2007, only 23% of its funding actually came from retail investors at all. The rest it borrowed short-term from other institutions. And on the 9th of August 2007, that market simply froze and it was built on leverage. Northern Rock's borrowing against its own equity went from about 23 times in 1998 to 58 times by the middle of 2007 to over 86 times by the end of that year. At that kind of leverage, it doesn't take much to tip you over.
Now, why did ordinary savers queue at all? Well, because back then your money wasn't fully protected. UK deposits were insured in full, but only up to 2,000 pounds and then just 90% of the next 33,000. So the most you could claim was £31,700. If you had more than that in Northern Rock, queuing wasn't panic. You could say it was rational. And the last time Britain had seen a bank run like this was back in 1866. So this was a once in a 140-year event. And it was the first tremor of the crisis that followed.
Now, one quick reassurance before we go on because I don't want anyone panicking about the cash in their current account. Your money is actually better protected today than it was in 2007. And I'll show you exactly how and the one simple thing I do about it at the very end of the video. But first, here's the bigger story, which is where the risk has quietly moved and why that should interest you a lot more than your own bank balance.
So, Northern Rock was the warning, at least here in the UK. But what started as a problem in a niche US subprime lending market blew up into a global problem. The official US post-mortem, that was the Financial Crisis Inquiry Commission, was really blunt about it. They said that the crisis was avoidable and it followed more than 30 years of deregulation that had stripped away key safeguards. And the numbers are staggering. The big five US investment banks were running leverage as high as 40 to 1. So a drop of less than 3% in their assets could wipe them out completely. Over the decade before the crash, financial sector debt had climbed from about $3 trillion to roughly $36 trillion. And when the Reserve Primary Fund, which is a money market fund that people treated almost like cash, broke the buck, it triggered over $40 billion of withdrawals in just a few days.
So, the world rebuilt the rules. Regulators made banks much sturdier by forcing them to use far more of their own money against their lending. And big US banks had to hold much more loss-absorbing capital against their loans. Major UK banks went from holding about 4% core capital in 2007 to over 14% today. And that core capital is mainly things like shareholders' equity and retained profits. Now, that's a bank's safety buffer, and it's a buffer which is now being trimmed.
So, here's the uncomfortable bit. This has all happened many, many times before. An IMF economist looked back over three centuries of financial regulation and found one pattern that repeats. Deregulation has preceded every episode since the 1825 crisis. Every one. The Glass-Steagall Act, which split risky investment banking from your high street deposits, was passed in 1933, and that was after the Wall Street crash. And then it was repealed in 1999 at the top of a huge boom. Less than a decade later, we got 2008. After that, regulators introduced the Dodd-Frank reforms, which was the biggest overhaul since Roosevelt's New Deal in the 1930s. And the author's verdict on these cycles was pretty scathing. They have a poor track record. We loosen the rules in the good times and we pay for it in the bad.
Now, the point of this video is that we're at the loosening stage again right now. But first, let's spend a minute on what capital actually is because it's really important to understand and it has two sides. Side one is the assets that a bank holds. It wants things whose values won't suddenly lurch down because a sharp drop punches a hole straight through the balance sheet. Side two is how those assets are funded. So those are the liabilities. Some of that funding is simply borrowed such as your cash deposits, but it also includes bonds issued by the bank. Loss-absorbing capital lets the bank's asset value shrink without anyone else getting hurt. At its core is common equity. So that's the bank's own shares and retained profit and regulators call that C1 and it's the very first money to take the hit. Above it sit higher tiers that can be written down or flipped into shares the moment the bank gets into real trouble. Plus a further layer of debt earmarked to take losses if it has to be wound down. Now the whole point of that stack is that when losses come they burn through the bank's own money first not your deposits and importantly now not the taxpayers's money.
Risk-weighted assets are how the regulators tie the two sides together. The riskier and more volatile an asset, the higher its weight and the more loss-absorbing capital the bank has to hold against it. A safe mortgage, for example, holds a low weight and a punchy corporate loan would have a high weight. Now, the tension comes because of the bank's profit motive. A bank's lending profit is roughly its leverage times its margin. So, how much it lends multiplied by that really thin spread between the rate at which it borrows and the rate at which it lends. So, it wants to lend as much as it can against as little of its own capital as possible. Loss-absorbing capital to a bank is essentially dead money. Regulators want the opposite. They want thick layers of loss-absorbing capital precisely because that's what gets burned when the value of loans and other assets fall in a crisis. The capital ratio measures that safety buffer. So that's the amount of loss-absorbing capital divided by those risk-weighted assets. If you cut the required ratio, then the bank is more profitable, but it's at a higher risk of bankruptcy.
Now, these changes are happening on both sides of the Atlantic at once. And we can start with the UK. The Bank of England's financial policy committee has cut the benchmark for how much capital the system should hold from around 14% of risk-weighted assets to around 13%. Now, that's the first reduction in capital demands since the financial crisis, and it does sound small. On today's balance sheets, it's worth around £60 billion. Less capital held against risk. Now, that's just the headline. Banker's bonus rules are being relaxed, too. So, the deferral period for senior bankers is being cut from 8 years down to four, and the rule book around it is being slashed by more than 70%. The mortgage affordability stress test, that's the one that checked if you could still pay if rates jumped. That was withdrawn back in 2022. And a new financial services markets bill loosens the ring fence that's meant to keep your current account separate from the investment bank. And that scraps a certification regime which covered almost £150,000 staff. The government reckons it'll cut firms' costs in the city by almost £127 million a year.
Now let's turn to the US which is going in the same direction. American regulators are easing the leverage ratio for the biggest banks and reworking the Basel rules so that in their own words the amount of overall capital in the banking system would modestly decrease. And not everyone inside the Fed agreed. Michael Barr, then the Fed's top supervisor, dissented in writing. He said the change unnecessarily and significantly reduces bank-level capital requirements by $219 billion for the biggest banks. And he warned that firms would likely use the rule to distribute capital to shareholders rather than lend more. His statement ended with the two words: "I dissent." Hold on to that line about shareholders because it matters in a minute. And the people loosening the rules. Well, in the US, the watchdogs are themselves changing. According to the Atlantic Council, Barr, the supervisor who dissented, was replaced by a vice chair who's more sympathetic to the banks' views. And the banks are now pushing to lock the lighter rules in.
Now, this part is analysis and forecast, not fact. So, treat it as informed speculation, but the direction of travel is not in much doubt. So, the rules loosened to free up capital for lending. Does that capital actually become lending? Well, let's look at where it's gone so far. UK banks have returned around £90 billion to shareholders through buybacks and dividends over the past 3 years. And the forecast for what's freed up next are eye-watering. The consultants Alvarez & Marsal in figures reported by the Financial Times estimate that the US deregulation could unlock $2.6 trillion of lending capacity with JP Morgan alone releasing $39 billion. Now, those are one firm's projections. So, take them as a forecast, not as a fact. But remember Barr's warning. As one of the same analysts put it, almost all the money the US banks made in profits they distributed to their shareholders. So some of the capital buffer is gone, but the risk it was covering hasn't.
So where did the risk go? Well, mostly into something called private credit. And that's lending that happens outside the banking system done by investment funds. And it has exploded. The IMF put it past $2.1 trillion globally and about three quarters of that is in the US. In the UK, it's recently been growing at around 17% a year. And the Financial Stability Board, which is the G20's global watchdog based in Switzerland, that names one of the drivers directly: changes in post-crisis bank regulation. In other words, tighten the rules on banks and the lending simply moves somewhere with looser regs. The problem is what's looser is also darker. The Financial Stability Board says plainly that the relative opacity of private credit cannot easily be resolved. Valuations in private credit get updated as little as once a quarter, which the FSB warns may create a first-mover incentive in a panic. So that's the digital age version of a bank run queue. And this is the market that the regulators admit they can't fully measure.
And the real problem is this. The risk doesn't actually leave the banking system. And that's because the banks lend to the private credit funds. Federal Reserve researchers found that bank credit lines to these vehicles grew from about $8 billion in 2013 to around $95 billion by the end of 2024. Their conclusion is the line to remember: "Some of the risk is actually not leaving the banking system as it appears." And you can see the leverage building in the plumbing. A small number of hedge funds had borrowed close to £1 billion. This is against gilts as collateral in the repo market and that was by November 2025. That's the most since records began. More than 90% of that borrowing is concentrated in just a handful of those hedge funds. Now, we saw in 2022 when the pension fund LDI blowup nearly broke the gilt market how fast that kind of concentrated leverage bet can unravel.
And the timing is the important thing here. We're loosening the rules at exactly the moment that the regulators are waving red flags. The Bank of England's own financial stability report says many risky asset valuations remain materially stretched with US equity valuations close to the most stretched they've been since the dot-com bubble and in the UK since the global financial crisis. This heightens the risk of a sharp correction. Even Europe's central bankers are uneasy. Christine Lagarde has cautioned against regulatory roll-back. And as Andrew Bailey put it in a recent speech, "If we throw out the baby with the bathwater by downgrading financial stability in the name of growth, we won't achieve our goals."
So, are we heading for 2008 all over again? I think the answer is no. And it's important to understand why. The banks really do hold far more capital. The European Central Bank judges that for now private credit is unlikely to be a source of systemic financial instability and the scale is different. US private credit is about $1.4 trillion which is around 4.7% of the US economy. The subprime mortgage market that detonated in 2006 was a similar dollar size but nearly 11% of the economy at that time. So, it's smaller relative to the economy than the thing that blew up last time.
And to be fair, there's a serious argument on the other side. The people loosening these rules say that the post-2008 settlement simply overshot. The Bank of England's own committee now judges that the truly optimal level of capital that's now lower than the benchmark it set back in 2015. And US regulators argue that rules pitched too high just push lending out of the banks where you can see it and into the shadows where you can't. And by that logic, some of this is simply a recalibration, not a reckless giveaway. Think of it like loosening your seat belt because you've driven safely for years. The reasoning holds right up until the moment you crash.
So the real worry was never that the rules get adjusted. It's the timing: loosening them while valuations look stretched and the destination: pushing the risk into a corner that no one can measure. And on that the Financial Stability Board's caveat is spot-on. Private credit remains untested to a prolonged economic downturn. In other words, we don't actually know how it behaves in a real recession because it hasn't lived through one yet at its current size.
Now, rather than worrying, I think it's best to just be watchful. So, I thought I'd share the simple checklist which I use. Firstly, I'd read the regulators' own scorecards. The Bank of England and the US Federal Reserve each publishes a financial stability report twice a year. They aggregate exactly these risks. And the Bank of England's countercyclical buffer decision is a direct readout of whether the FPC is worried.
Number two, watch the overall mood of markets. Now, one of the ways you can do that is with our own cross-asset risk tracker. That's a single dial from zero to 100. So zero is full fear. That's money fleeing to safety. And 100 is full greed. Everyone reaching for risk. It doesn't lean on any single number. It equal weights six cross-asset signals. How broad the global equity rally is. How jumpy volatility is. So that's VIX. Whether lenders are still relaxed about risky company debt. The classic safe haven currencies. Whether money is hiding in treasuries and gold or staying in risky assets like shares. And whether investors are chasing the racy stuff or the defensive stuff inside markets. When it's parked up in the risk-on green, that's complacency. The signal that matters is the extremes. Historically, the deep fear readings have tended to be the better moment to buy, not the moment to panic and sell.
Number three, I'd watch long-term government bond yields. If there is a sudden jump, like the 2022 pension fund episode, will that stress in the plumbing that retirees rely on?
Number four, and this is the one that ties back to the start, be suspicious of too good to be true savings rates. If a bank is paying conspicuously more than everyone else, and that's to pull in your deposits. Ask why it needs your cash so badly. That was the tell with Northern Rock and with Icesave, which brings it right back to your own money and the good news I promised you at the start. Today, your deposits are protected up to £120,000, and that's per person per banking institution. That limit went up to £120,000 on the 1st of December, 2025, and there's extra cover up to £1.4 million for 6 months, and that's for temporary high balances for things like a house sale. But here's a gotcha, and it's one thing I actually check, which is that the protection is per banking license, not per brand. If two high street names you think are separate actually share one banking license, then your money across both of those counts towards a single £120,000 limit. So, the simple thing I do is keep the balance with any one license under that figure. And if I'm near it, I check that my two banks aren't secretly one bank.
So, the capital rules behind the system are being loosened, and the real risk is drifting somewhere that's harder to see, and you can't control that. But that one move means no single bank failure can ever touch your money, whatever happens next. So, tell me what you think in the comments. Are we genuinely safer than 2008, or are we just loosening the seat belt again? I do read the comments, so please do share your view. And if you'd like access to that risk tracker and all of our other ones, plus loads of member-only content, and of course our chat app where you can ask a question whenever you like, the links in the description below. And as always, thank you for listening.