Faced with cut-throat competition, British banks fuelled the boom. Now in the gloom we see the debilitating price of their excesses. By Shirley Skeel.
After 35 years in banking, Peter Cooke is able to break all the rules. So when this former Bank of England chief supervisor pauses in his considered way, and then suddenly swings into a venomously funny fairy tale, it is easy to forget that real life banking has no room for a sense of humour.
From the safe heights of his riverside Price Waterhouse office where he now consults, Cooke tells the story of a beautiful princess with three suitors. To choose among them she throws a gold coin into a river, promising her hand to the one who brings it back. Two of the young men instantly leap in, churning up the river bottom. But both fail, and return dripping wet to the bank. Thoroughly chagrined, the princess scrutinises the three from head to toe. "And then", finishes Cooke blandly, "she decides to marry the one who is still dry."
This truly is the story of banking in London. For a decade or more, beautiful princesses, with names like Shell, ICI and Hanson, tossed their gilt-edged business into the City pool, and asked bankers to leap heels up into the brine and scramble for it. While it lasted it was lots of fun, and many young careerists made their name inventing brazen new instruments to scoop the shallows or crushing toes to get another's booty.
But as summer flushed in last year, the final reckoning came: suddenly eight years of boom deflated into gloom. Today the banks all look, to varying degrees, rather wet. Their legacy is one of bad loans and tight margins; of sackings and sinking profits. It is only those who were booed down earlier as cowards who look at all respectable. "It all comes down to animal spirits," TSB's director of strategic development, Christopher Smallwood, reflects wryly. "It's a fundamental part of human nature - the urge to action rather than inaction, even when it is better to do nothing."
All of the banks have their troubles, but if a quiet vote was taken in the City it is Lloyds which would come out as the cleanest, with a special merit to Bank of Scotland, though it has a healthier marketplace. Barclays remains the strongest, but will yet get a buffeting from bad debts. National Westminster has been embarrassed in the United States; Standard Chartered is not too pretty a sight; and Midland is so ensconced in the mud that everyone is wondering who is going to be the first to pull it out.
To be fair, British banks have been far more restrained than many overseas, and, says Lehman Brothers bank analyst Chris Wheeler, they have decent capital backing. But the question lingers: did the banks go overboard with their lending and worsen the boom and bust? The simple answer is yes.
In eight years of boom times there were simply too many banks scuffling for too many high-minded clients. "A lot of banks felt the pressure. It led to a great lack of caution," says Standard Chartered's executive director for banking, Malcolm Williamson. "There was less attention to the issue of who else was lending money to these companies. And if they asked what other facilities the finance director had, he would say 'Look, if you want that kind of information, just buzz off'. Nobody knew what the hell was going on."
What can now be seen as a revolution in banking sneaked up on the City in the 1960s and '70s. First foreign banks moved in, elbowing for customers. Then, in the early 1980s, an entrepreneurial Conservative government set the deregulation lion loose. Suddenly the homespun building societies found banks siphoning out their customer base. Thoroughly shaken, they counter-attacked. Then in 1982 lending to the Third World turned into a crisis as Mexico defaulted. The foreign banks, starved out of that business, turned hungrily to the British corporate market. In short, the banking war had begun.
Over the next eight years British businesses played the game for everything that they could get - bidding one bank off against another for cheap loans, gearing up to levels never seen before and pursuing funds through the corporate bond markets, thus cutting out the banks.
"The banks had to go downmarket," says Robin Munro-Davies, managing director of credit rating agency IBCA. "You always knew that if you didn't make this ridiculous loan, someone else would. The Japanese just tore this market apart, lending at ridiculous spreads."
Some bankers describe it as an exhilarating, if punishing, time. "A lot of the banks have had a lot of adrenalin flowing," says Midland's investor relations manager, Mike Stephenson. But it also meant a breakdown of loyalties on both sides.
During the 1980s a new animal called the corporate treasurer was hauled into many British companies to hunt out the best loan bargains. Lord Inchyra, secretary general of the British Bankers' Association, recalls: "There was a time when people who banked with Bank A were very loyal. So this playing off of the banks was often very irritating and it did occasionally call for some heart-searching. Should one match a rival banker's offer, or better it in order to keep one's hold on this customer, or should one say 'Well, off you go, chum'."