Analysts warn UK banks are still too large

Tim Wallace
Follow Tim
BRITAIN’S banking sector is dangerously big despite slimming down in the wake of the financial crisis, and Europe’s lenders are only half way through scaling back, a top analyst from RBS warned yesterday.

Alberto Gallo believes a safe system should have assets of 200 to 300 per cent of GDP – while the UK’s is 3.5 times larger than the economy even excluding overseas subsidiaries.

He fears a banking system on such a scale is dangerous if the state could be called on to bail out banks.

However, new rules are designed to end this, making it possible to wind down bust banks safely.

The Bank of England hopes banks will be able to create plans to let non-essential parts fail when a lender gets into trouble.

Despite their size Gallo said UK banks are unlikely to shrink further.

Instead, most changes are still to come in the Eurozone, particularly the peripheral economies. Its banks are also 3.5 times the size of GDP, and Gallo expects €3 trillion (£2.58 trillion) more deleveraging is to come – which he expects to hit SMEs in Italy and France the hardest.

“Some weak points remain Italian and Spanish mid-sized lenders,” Gallo said. “They are vulnerable to non-performing loans and any rise in sovereign bond yields.”