Northern Rock crash has led to a safer UK banking system, says Virgin Money boss Jayne-Anne Gadhia


Northern Rock collapsed 10 years ago this week (Source: Getty)

There has been much coverage this week of the 10th anniversary of the 'run' on Northern Rock.

Over the course of the last decade so much has been done to improve the stability of the banking system. Capital has been increased to protect against losses. Liquidity requirements have been massively uplifted to make sure that banks can't run out of the money they need to fund their business. Accountability has been clarified.

All in all, customers and taxpayers are much better protected than ever before from issues in the banking system.

Read more: UK banking is "accident waiting to happen" 10 years after Northern Rock

But 10 years on, questions are being raised about whether another crisis could happen and the Bank of England are rightly pointing to a rise in consumer credit as a potential issue.

Interest rates are low and lenders need to ensure that customers who have taken out debt today can afford their repayments in future.

Good banks have already taken this into consideration and are lending responsibly to those who can afford their repayments even if rates rise.

But a report published by the Adam Smith Institute this week questioned if enough has happened to make sure that the system is strong enough for the future. In particular it encouraged more extreme stress tests on banks to make sure that they can withstand any future crises.

Maybe we should go further, but an analysis of Northern Rock before, during and after the crisis shows that we have come a long, long way in improving the resilience of the banking system.

Between 2000 and 2007 Northern Rock's balance sheet grew from around £25bn to over £100bn. That level and speed of growth would simply not be tolerated today.

And the capital it held to support that balance sheet was a lot less than a bank of a similar scale would be required to hold now.

Critically, Northern Rock funded around three-quarters of its balance sheet from the wholesale funding markets. And when those markets closed Northern Rock failed.

Banks are now far less reliant on wholesale funding sources.

So, the last decade has seen a sea change in the very foundations of banking and a material increase in necessary protections.

When Northern Rock failed customers were worried about their savings. That could not happen today as £85,000 of savings in each bank that a customer uses are protected by the government. I sometimes think that the value of that protection is underestimated.

Responsible lending has also been a major theme of the last decade with a particular focus not only on what a customer can borrow but specifically on what they can afford to pay back if interest rates rise.

That has specifically and positively affected the mortgage market. Income multiples are lower compared to the high multiples used before the financial crisis and banks now conduct detailed affordability assessments to decide on how much they are willing to lend. They will also test that customers can afford repayments at interest rates significantly higher than the current rate.

All in all underwriting standards have improved - for secured and unsecured lending.

But with interest rates low, the Bank of England are rightly pointing to a rapid growth in consumer credit as something to be watched - in particular car finance, unsecured loans and balance transfer credit cards.

This scrutiny is to be welcomed.

Prudent lending and affordable borrowing are as important as financial regulations and bank stress testing if we are to learn the lessons of the past.

But, with so much learned and so many actions taken, banking today is so much brighter than it was a decade ago.

Regulators and banks have worked to protect the consumer - not only to make more credit available but to make it safer to access. And banks are safer too.

Perhaps the tragedy of Northern Rock has resulted in a better, brighter banking system for the UK and for us all.

Jayne-Anne Gadhia is chief executive of Virgin Money, which bought Northern Rock in 2011, and a judge in this year's City A.M. Awards

Read more: Northern Rock: 10 years on from the bank that failed

Podcast: Jayne-Anne Gadhia on her life in finance

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