Does the UK have the least resilient financial system in the G7?
An independent think tank, the New Economics Foundation, has revealed shocking statistics that show just how vulnerable the UK’s financial stability still is. Despite much positive press stating that the economic recovery is well under way, the NEF suggests that without major reform our monetary situation remains both unsteady and uncertain.
The Significance of Resilience
The organisation was driven to complete the research, as they felt there was some ambiguity as to what exactly resilience is and how exactly it can be measured. Following the identification of key areas by which a nation’s financial well-being can be measured, the group was able to create the Financial System Resilience Index. The findings place the G7 countries in order, leaving the UK languishing at the bottom of the pile.
Through its research, the NEF looked at the following for each of the countries that make up to G7: the size of the financial system; its complexity; its transparency; the makeup of its liabilities; any assets attached; and its connections, both positive and negative, to financial systems elsewhere. In addition to this, the NEF considered the tried and tested – and deemed to be unsuitable – measurement of assets to capital ratio.
What Has Harmed the UK’s Financial Resilience?
Taking all of this into account, the UK only managed a measly 27 out of a possible 100, leaving it trailing the top country, Germany, by 46. Although the US was considered second worst, it still managed a score of 56 – nearly twice that of the UK. Although the UK’s resilience has been shown to have improved ever so slightly since the economic downturn of 2008, questions remain as to how it continues to fall behind international competitors.
Much of the difficulty lies in the issues that were so intrinsic to the credit crunch itself. In particular, the perceived stagnation of UK banks prior to the downfall, which resulted in a lack of diversity and a period of nearly no professional development. But there was also the huge amount of personal debt accrued by UK homeowners, the ripples of which continue to cause ructions in the financial industry today.
How Have Other Countries Weathered the Storm?
So how exactly did Germany, a country of comparable wealth, manage to sidestep such a dramatic downturn? Some may think it a lucky coincidence, but Germany’s actions prior to 2008 had much to do with its resilience after it. Restructuring labour markets and making a concerted effort to reduce the country’s deficit meant that Germany’s losses, when they came, were far less catastrophic than those felt elsewhere. And that is why they are now considered a leading light in European economic reform.
As for the UK, experts suggest it is the government that must now take control and battle to reinforce the country’s financial resilience. Although much of the recent election campaign discussed the faults of the past, there was very little focus on what needed to be done going forward.
The NEF’s advice is that the oft-mentioned possibility of breaking up the big banks really must become a reality. If the financial sector is to recover, it must improve its levels of competition by offering consumers genuine alternatives. Adopting a holistic approach, and promoting the likes of peer-to-peer lending, will be vitally important if the score of 27 is going to improve. Experts say it is for this newly formed government to recognise the need for restructuring and rebuilding – and they must do so sooner rather than later.