Not since the last recession 13 years ago have Britain's banks faced so many uncertainties.
If the UK economy steadily improves -- or at least gets no worse -- they will weather the storm and emerge leaner and fitter than they did prior to the Sept. 11 attacks on the US. But if it falters, if interest rates have to rise, if unemployment shoots up or the housing market crashes, there will be terrifying consequences.
That is because the economy is riven by what economists euphemistically call "imbalances," which translates in layman's terms as banana skins that could trip the UK into an ugly recession.
The most worrying imbalance is linked to the high level of indebtedness, compounded by the lowest interest rates since the 1950s. That has encouraged consumers to borrow as never before.
By the end of last year, consumer debt in Britain had reached ?828 billion, the equivalent of 125 percent of UK households' disposable income. Another worrying statistic turns on the amount borrowed on credit cards. In three decades, it has risen from ?30 million (at today's prices) to ?49 billion. The stoking of house prices, related to low interest rates, has stimulated demand and encouraged consumers to borrow to the hilt.
Yet when the clearing banks report their figures this month, analysts are not expecting any nasty surprises. For now, there will be no rising provisions to take account of sour mortgage debt or an increase in the number of big corporate collapses.
The major banks are forecast to produce reasonable results in line with market expectations. Even banking giant Lloyds TSB, which considered cutting its dividend, will probably not do so as new chief executive Eric Daniels is raising cash via overseas sales. Rivals Barclays Bank and HSBC have published relatively upbeat trading statements, though HSBC is axing hundreds of jobs to bring costs more in line with income.
But even if Chancellor of the Exchequer Gordon Brown manages to engineer a soft economic landing, margins are beginning to be squeezed because banks are reluctant to lower savings rates for fear of losing customers to other institutions.
This means that the gap between rates paid by borrowers and savers is narrower than it might be, hitting interest margins and depriving the banks of much needed cash. With base rates still on a downward trajectory, brokers forecast slowing profits growth for banks over the next year or two.
The position, however, is fragile and it would not take much to herald a period of stagnation, which is why the banks are a hostage to the wider economy. As John Tyce at SG Securities says: "Things are at a delicate stage, we could rock either way."
But Peter Toeman, a banking analyst at Morgan Stanley, dismisses the notion of a housing crash.
"Things are cooling naturally at the moment first-time property buyers can't get into the market," he says. "That causes a logjam for those already on the ladder. The only way to ease it is to lower asking prices."
But the banks could find life difficult even without a crash Germany shows that you can have low interest rates and falling house prices.
"If this is accompanied by economic stagnation and steadily rising unemployment, the effect will be pretty unpleasant," says one London-based economist.
Three weeks ago, Mervyn King, the new governor of the Bank of England, said the economy would soon lose its feel-good factor for consumers. But UK interest rates are still at rock bottom and figures last week showed another surge in high-street sales as consumers took on more debt. The banks' day of reckoning may only have been postponed.
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