Richard Reynolds, Head of Commercial (Midlands) at Atradius, takes a look back over the last decade, and outlines the effect that the credit crunch has had on the economy.
It’s hard to believe that the words ‘global financial crisis’ have now been part of our vocabulary for a decade. So, what has been learned and what has changed?
The origins of the crisis stemmed from the wholesale default of US subprime mortgages, where people with low credit ratings – and in some cases no jobs or assets – couldn’t meet payments that were subject to increasing interest rates. Subprime default rocketed; demand for mortgage backed securities (MBS) slumped, and structured investment vehicles (SIVs) that allowed banks to invest in MBSs had to be bailed out by the banks that created them.
By August 2007, Germany’s IKB bank had failed and BNP Paribas froze withdrawals on three accounts linked to the subprime sector. Banks stopped lending, including to each other, for fear of acquiring toxic debt, which dried up lines of credit for a diverse range of businesses, globally. By the end of 2009 more than 50 banks, building societies, insurers and investment groups had either declared bankruptcy or been acquired, 12 of which were British, the first being Northern Rock.
During the crisis, it was inevitable that the trade credit insurance market experienced higher volumes of claims. However, a comparison between 2008 and 2016 of the percentage of claim payments made to individual business sectors makes interesting reading.
In 2008, five sectors accounted for 60% of Atradius’ claims: chemicals (10%), construction (16%), consumer durables (12%), paper (11%), and textiles (11%). By 2016, just four sectors accounted for 59% of claims with chemicals, construction and consumer durables increasing to 11%, 20% and 16% respectively. Whereas electronics had grown from just 2% in 2008 to 12% in 2016, reflecting the changing fortunes in the marketplace.
Company insolvency levels have dropped from around 6,500 in 2009, to just over 4,000 in Q3 2017, indicating a marked improvement in business stability, supported by the additional banking and financial sector safeguards introduced.
A decade on from the credit crunch, there is a general belief that the fundamental issues that caused and exacerbated the situation have been rectified. Essentially, the range of measures – which include new bank leverage ratio disciplines and increased capital requirements for banks – have plugged the holes in the banking and investment process that were torn open during the crisis.
Banks are now less dependent on interbank trading, which has fallen by more than 60% of its pre-crisis level. UK banks now hold more than £700bn of high quality liquid assets, ensuring they can withstand 30 days of funding difficulty including large withdrawals. The Bank of England has indicated a new confidence in resilience to withstand future shocks, albeit a confidence tinged with caution subject to the Brexit factor. As the credit crunch unfolded, UK interest rates were cut dramatically and remained at unprecedentedly low levels for far longer than was ever imagined. Only now, as we pass the 10-year anniversary, are we seeing the Bank of England take steps to nudge rates higher.
On a broader level, attitudinal and cultural changes inform today’s more tightly controlled environment. There is broad realisation that the unexpected can and does happen and that the consequences can be severe.
With Brexit at the top of the agenda for UK, and indeed for Europe, the prospect of risk does not diminish. In a recent report the Bank of England cited Brexit, alongside high levels of consumer debt, as areas of risk to the UK’s financial stability. China is also highlighted as a concern, in particular China’s continued and widespread use of SIVs in an economy where the ratio of total debt to GDP is more than 300%. Pre-crisis, many believed that banks were too big to fail, but fail they did. Now, many banks are even bigger than they were 10 years ago, and China is the home of the largest – with both the China Construction Bank and Commercial Bank of China three times larger than a decade ago.
Risk will always be present, whether in a domestic or international economy, or purely when one business has the trust to trade on credit with another. However, if there’s one key piece of wisdom to take from the experiences of the past 10 years, it’s that up to date, accurate information is essential to reduce exposure to unnecessary or unprotected risk.
With access to accurate and up to date information, businesses are able to manage the risks in front of them and are protected from the impacts if things go wrong, enabling them to trade more safely and confidently in an environment where commercial and political situations are constantly evolving.
Atradius provides trade credit insurance, surety and collections services worldwide through a strategic presence in 50 countries. Atradius has access to credit information on 200 million companies worldwide. Its credit insurance, bonding and collections products help protect companies throughout the world from payment risks associated with selling products and services on trade credit. Atradius forms part of Grupo Catalana Occidente (GCO.MC), one of the leading insurers in Spain and worldwide in credit insurance.