The main concern of banks, however, was the inexorable squeeze on their margins. Twenty years ago banks were humming along on top quality corporate lending margins of over 2%. In the later 1980s these were as fine as three-eighths-of-a-percent or less. Barclays' congenial managing director, Andrew Buxton, sighs: "To replace its capital a bank needs much more than a three-eighths-of-a-percent margin." (This varies with the market.)
The obvious solution was to exploit new areas. Thus there was a charge, led by NatWest, into the smaller entrepreneurial sector and a wooing of the retail customer. Charges for personal banking were slashed and new products tucked in. It became, says Midland's Stephenson, "like going from shopping in Romania where there is bread or no bread, to going to Waitrose and finding there are 50 kinds of bread."
The other big move was overseas. Standard Chartered and Barclays recently effected a retreat from the US. But NatWest and Midland thought the decade right for an incursion into America. US banking was huge, fragmented, and the targets so transparent, says analyst Chris Wheeler, that "you could find out the colour of the chairman's underwear". Under former chief executive Geoff Taylor, Midland bought the US Crocker Bank. It was a disaster and was sold in 1987. NatWest, under chief executive Tom Frost, dug into New Jersey, after an earlier buy in New York. The new banks are sound, but now hamstrung by the plunge in US real estate.
The Lawson boom years, post 1987, dangled the final carrot in front of the banks. The crackling mood of the boom had made them uneasy, but none was willing to pull back. Then, as they watched, demand leapt again. A cut in personal income tax, easy credit and news of an August 1988 deadline for dual mortgage tax relief set property prices alight. Haunted by memories of the 1970s fringe banking crisis and under pressure from the Bank of England to improve their capital ratios, the banks were warily rescrutinising their risk management.
But in some respects it was too late. Big commitments had been made and were still being made to overgeared companies and the skyrocketing property sector. In the five years to August 1990 bank lending to property companies jumped from £6.6 billion to £37 billion.
Then, in the summer of 1988, property started to reverse; and a year later the country sank into recession. Lord Inchyra mirrors the thoughts of many bankers with the words: "You can't win really. You're either accused of being a barnacle on the ship of progress by declining to support people with adventurous financing techniques, or you do so and then get accused of encouraging everybody to overdo it."
The fact that it was badly overdone in some quarters is now clear. The evidence is in the 103% jump in company failures in 1990 and in the troubles of groups such as Brent Walker, Goodman, News Corporation, WPP, Polly Peck and Coloroll. Malcolm Williamson of Standard Chartered, lead bank at both Brent Walker and Polly Peck, is now observing the process ruefully. "UK banks are now saying 'Why should we (hold up a collapsing firm)? If we were raped by the foreign banks, why stand by and bail out these silly clots who get in trouble?'"
The real extent of the damage to the banks will be known shortly. Annual results are due out over the next two months and bad debt provisions are expected to be steep. "We've got the climbing tackle out at the moment," quips Midland's Mike Stephenson. "It's a sheer face." It is believed that Barclays and NatWest have pencilled in £1 billion of provisions each, with a total of near £3.5 billion for the four major clearers.
So what now? Christopher Smallwood at TSB predicts that the rumblings so far are only a precursor to a big shake-out among the banks. "The process of merging will accelerate and you will find that maybe not all the banks will survive." Already the number of building societies has shrunk from over 270 in 1980 to about 100 today. Midland, once one of the world's biggest banks, is the most obvious prey among the big players.
The survival tactics now underway - training, technology and housecleaning - are doing wonders for the physiques of the banks, if horrendous things to the unemployment figures. Unfortunately the individual victims are not necessarily the guilty. Presumably, though, the future will see a more sagacious measure of caution. That is ... until the next boom.
