UK: Deloitte Monday Briefing: Living With Less Credit

Last Updated: 12 November 2012
Article by Ian Stewart

Most Read Contributor in UK, August 2017

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.

  • The global financial crisis turned a long credit boom into a credit famine. It looks as if corporates and consumers in many western countries will have to get by for years to come on a much reduced supply of bank lending.
  • The most leveraged banks, and those with the greatest dependence on wholesale finance, were more vulnerable, and saw larger declines in share prices during the financial crisis.
  • Banks, like consumers, corporates and governments, have sought to strengthen their position and protect themselves from uncertainty by reducing debt levels. One way of doing so is by cutting lending to households and businesses.
  • Deloitte's recent European Bank Deleveraging Survey found that new requirements to hold more capital have been the key driver of bank deleveraging. Difficulties raising finance in markets and more stringent liquidity standards have added to the pressure on banks to reduce debt levels.
  • Bank lending collapsed in 2008/9 in Europe and the US. Weighing the exact role of supply and demand factors in this process is impossible. Yet it is clear that demand for credit from consumers and companies has been hit by many of the uncertainties which have constrained bank lending.
  • We can, however, observe exactly what has happened to the level of debt in different economies.
  • The stock of US private sector debt contracting sharply in 2008/10. US consumers started repaying debts in 2008 and have continued to do so. US corporates deleveraged aggressively during America's recession, but, in a little noticed development, bank borrowing has since rebounded. In the last year US corporates' bank borrowing rose by 13%.
  • Europe's credit crash came slightly later and, in its early stages, was less acute than America's. Borrowing by consumers remains weak in the UK, euro area and the US. The big difference is in lending to corporates, where UK and Euro Area corporates continue to repay bank borrowing, while bank borrowing by US corporates is growing at double digit rates.
  • One possible explanation is that US banks have made faster progress in strengthening their balance sheets than their European counterparts and are now more able to lend. America's superior growth performance also increases the relative attractiveness for banks of lending in the US rather than in Europe.
  • The process of bank deleveraging is measured in years not months. The US seems be ahead of Europe in sorting out its banks. More than two thirds of respondents to Deloitte's recent survey said they expected deleveraging in Europe's banks to take at least five further years to complete.
  • The implication is that European consumers and corporates will have to manage with a reduced supply of credit for several years to come.
  • This is likely to spur the growth of alternative sources of finance. Europe could, for instance, develop a larger, US-style corporate bond and commercial paper market which could fund business. Peer to peer funding websites, such as Funding Circle or Zopa, which enable retail investors to channel their savings into businesses or to other consumers, offer another way of kick starting lending. New lenders, funded perhaps by pension funds, sovereign wealth funds or asset managers, may try to fill some of the gaps left by the banks.
  • History does offer some comfort, suggesting that economies can and do grow without credit. Morgan Stanley estimates that, on average, credit squeezes last twice as long as recessions. Recoveries typically get underway even as credit continues to contract. A creditless recovery is not only possible, it is the norm.
  • There, is however, a significant caveat to this. Such creditless recoveries tend to be weaker than ones accompanied by credit growth. Investment, in particular, suffers when credit is constrained.
  • Bank deleveraging in Europe needn't derail growth, but it is bound to restrict it.


UK's FTSE 100 ended the week down -1.7% on worries over the US 'fiscal cliff' and eurozone debt fears.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • US President Barack Obama was re-elected to office, winning 332 of the 538 available Electoral College votes - US elections
  • The Greek parliament narrowly approved a new austerity package, totalling €18.5bn of further budget cuts by 2016, paving the way for a €35bn payment from the country's "troika" of creditors – Greece
  • US home prices rose at an annual rate of 7.6% in Q3 2012, the largest annual growth since 2006, according to data from the National Association of Realtors – US housing
  • Italian police seized assets with a combined value of €65m, including a 15th century castle, from 13 people suspected of tax evasion – Italy
  • The Bank of England opted to keep its base rate at a record low of 0.5% for the 44th consecutive month, whilst also deciding against extending its quantitative easing programme – interest rates
  • The French and Belgian governments agreed to inject €5.5bn to bail-out banking group Dexia – banking stress
  • Dutch financial services group ING announced it is to cut 2,350 jobs, or 2.5% of its workforce, preparing to separate its banking and insurance operations – banking stress
  • UK manufacturing output rose by a slower-than-expected monthly rate of 0.1% in September – slowdown
  • The International Monetary Fund (IMF) warned that high tax rates in France are leading to a "significant loss of competitiveness" – competitiveness
  • French Prime Minister Jean-Marc Ayrault announced a series of measures aimed to reduce French business taxes, including a €20bn tax break over 3 years – competitiveness
  • Online gambling group Betfair withdrew its online sports betting exchange in Germany, citing the country's uncompetitive gambling tax regime – tax
  • UK new car registrations rose at an annual rate of 12.1% in October, according to the Association of Society of Motor Manufacturers and Traders (SMMT) – UK consumer
  • A list of the world's richest people compiled by Bloomberg Markets reveals that the wealthiest 200 are worth a collective $2.7 trillion – more than the UK's annual GDP – rich list
  • UK discount fashion retailer Primark saw a 15% annual increase in revenues in the year to 15th September 2012 – growth markets
  • German carmaker BMW saw a 16% year-on-year increase in net profits in Q3 2012, driven by a 30% rise in sales in China – emerging markets
  • Cosmetics group L'Oréal announced it is to open a €100m factory in Indonesia, it's largest in the world, to take advantage of Asian demand for make-up, shampoo and face creams – emerging markets
  • UK Chancellor George Osborne topped a list of public figures that most often appear in British nightmares, followed by former Prime Minister Gordon Brown, according to a survey of 2,000 people by hotel group Travelodge – financial fear
  • Job-seekers in Cynon Valley, Wales, have been offered free spray tans and makeovers as part of an initiative launched by the local Job Centre to boost confidence and offer incentives – beauty market

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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