Every 17 years since 1974, the UK financial system has experienced a disruption of varying severity: the Secondary Banking Crisis in 1974, BCCI in 1991, and the global financial crisis in 2008. With 2025 on the horizon, could this pattern repeat itself?
The 1973-1974 collapse of London and County Securities (L&C), a secondary bank, was driven by fraudulent concealment of losses, overstated profits, and over-exposure to the property market. These issues culminated in substantial losses when interest rates rose sharply from 5% to 13%, triggering a wave of mortgage defaults. The collapse set off the secondary banking crisis (1973-1975), during which many similar institutions faced difficulties due to declining property and share prices following contractionary monetary policy prompted by the oil embargo. In response to the growing crisis, the Bank of England began the “lifeboat operation”, providing increased liquidity, short-term lending and insolvency support to stabilise the financial system. In the long term, the crisis influenced financial reforms, including stricter bank oversight, higher capital requirements, and tighter restrictions on property lending.
Seventeen years later, in 1991, the Bank of Credit and Commerce International (BCCI) was shut down by regulators after it was discovered that the bank had engaged in extensive money laundering, fraud, and other criminal activities, along with attempting to cover them up. The bank’s liquidation, involving assets exceeding £20bn, caused losses of over £30m across 20 local councils.
Finally, the last major event in this 17-year pattern was the 2008 Financial Crisis. Triggered by the collapse of the US subprime mortgage market and widespread financial mismanagement, the crisis significantly disrupted global economic performance. Local authorities felt the effects acutely, as reduced central government funding and increased demand for public services left many struggling to balance their budgets.
In this way, this 17-year financial cycle suggests it would be prudent to look ahead to 2025 and consider potential risks on the horizon. Identifying these vulnerabilities and understanding how local authorities can prepare will be crucial in mitigating the impact of any future disruptions.
While many financial issues that precipitated past crises, such as individual instances of bank fraud or the accumulation of systemic risk, are inherently difficult to anticipate, there are several material macroeconomic risks heading into the new year. First, on the less political side, fiscal and monetary uncertainty, particularly the impact of weakened fiscal guardrails leading to higher yields in developed countries and the slowing of the monetary easing cycle due to persistent inflation, may negatively affect borrowing costs. Although a full-blown fiscal crisis, characterised by sharp spikes in yields, capital flight, and austerity, is not the most likely outcome, higher yields appear probable under current conditions and indeed the 30yr gilt yield recently hit a 25-year high. The continued slowing of the easing cycle plus higher long-term yields remains a concern for the broader economy, though its broader impact on financial stability is less certain. This combination of factors could lead to reduced credit availability for households and businesses, potentially deteriorating bank asset quality as consumers struggle with higher debt servicing costs and businesses face reduced profitability.
On the more political side, continued escalation of trade tensions and geopolitical conflict in Eastern Europe, the Middle East and East Asia could significantly harm the UK’s economy and financial system. For instance, Trump’s proposed 10% blanket tariff would have a strong impact on the UK, given that the US is its largest trading partner. The tariffs and any potential retaliation from the UK could lead to a depreciation of the pound and an increase in import prices, further exacerbating inflation and contributing to the higher yields described earlier. Closer to home, economic and political issues in both France and Germany are likely to reduce demand for UK exported goods. Reduced trade, especially if heightened protectionism escalates into a trade war, could also result in a notable contraction in GDP.
The combination of higher import-driven inflation, rising yields, and slower economic growth may increase the prevalence of non-performing loans, putting additional strain on banks and other lenders. Moreover, further escalation in foreign affairs could amplify these challenges although the impact of any such situation is inherently harder to predict. Increased government spending on military and defense in response to heightened conflicts could exacerbate the fiscal challenges outlined earlier, further pressuring public finances and contributing to higher yields. Beyond fiscal impacts, escalation could further disrupt international trade, increasing volatility in financial markets. For example, heightened tensions in Eastern Europe or the Middle East could lead to further energy supply disruptions which would further fuel inflation and slow the course of monetary easing, as was the case at the outset of the Russia-Ukraine War.
While the financial sector heading into 2025 presents some risks, it’s important to recognise the strengthened foundations of today’s banking system. Compared to previous crises, banks are now better capitalised, with more robust regulation and stress-testing mechanisms in place to forecast and withstand economic shocks. Additionally, consumer resilience to rising interest rates, particularly through less exposure to variable-rate mortgages, further mitigates the potential fallout from monetary changes. While history has shown that financial disruptions often emerge from unforeseen vulnerabilities, UK pension fund LDI strategies for instance, these structural improvements offer some reassurance. However, the potential for regulatory loosening by both the US and UK governments to boost growth could introduce new vulnerabilities. By remaining vigilant and proactive, treasury functions can better navigate the challenges of this highly uncertain and evolving economic environment.
If you would like more information on our credit risk assessment, advice and monitoring or economic forecasting, please contact us at treasury@arlingclose.com.
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