It’s hard to choose a date that truly represents the global financial crisis. For some, it was 9 August 2007, when BNP Paribas suddenly froze three of its funds. For others, it was the run on the banks which led to the nationalisation of Northern Rock in February 2008. And for others, it was the image of Lehman Brothers employees clutching their boxes as they left the company headquarters for the last time on 15 September 2008.
But for most people, the scale of the crisis is still sinking in. Low interest rates, an ongoing housing crisis, and fewer borrowing opportunities – these are all hangovers from the events which took place a decade earlier.
How have things changed?
There is no doubt that the financial landscape has changed a lot since then. For a start, Basel III regulations have led to much tighter controls on banks and building societies. Before they lend out any money – whether it is in the form of a mortgage, a bond or a business loan – banks must be able to prove that they can absorb any potential loss. This rule was created as a way of avoiding another Northern Rock disaster, but it has had the side effect of making banks much less willing to lend money to anyone, regardless of their creditworthiness. Gross volumes of mortgage lending slipped, and have yet to fully recover, while SMEs still struggle to access funding from the usual sources.
Meanwhile, savers have had to foot the bill for the historically low interest rates which were implemented by the Bank of England in the wake of the crisis. By March 2009, the base rate had dropped to a then-record low of 0.5 per cent. Last August, it was reduced to 0.25 per cent in the wake of the Brexit vote.
This has had a knock-on effect on savers – particularly those who have been used to keeping their money in cash ISAs and other bank-based savings accounts. By December 2016, there was not one single cash ISA in the UK offering more than one per cent to savers, and the lowest-paying cash ISA is currently offering just 0.01 per cent in returns.
What have we learned?
Through regulation, legislation and part-nationalisations, the government and the regulator have been working to ensure that we do not repeat the mistakes of the past. But in an effort to avoid financial stagnation, investors and borrowers are already looking ahead.
Over the past 10 years, a number of financial disruptors have emerged, offering retail consumers an alternative to the institutions of the past. Challenger banks such as Metro have rocketed into the FTSE 250, and inspired upcoming launches such as the much-anticipated Zopa Bank.
Meanwhile, asset based lending is fast replacing overdrafts and traditional bank loans, as more and more SMEs look at alternative means of financing and growing their business.
At the forefront of all of these changes is peer-to-peer finance. By stripping back the traditional banking model and bringing borrowers and lenders together in one place, they have been able to offer some of the most competitive interest rates on both sides of the market. And ever since the Innovative Finance ISA (IFISA) was introduced last year, P2P investors have been able to benefit from tax-free returns.
Of course, P2P finance is not the only alternative to traditional banking. Crowdfunding, exchange traded funds (ETFs) and hard assets have all seen a surge of support over the past few years, as investors seek out new sources of income within their new risk parameters.
If there is one thing that the financial crisis has taught us, it’s that nothing is risk free. The hunt for alternative rewards is forcing innovation across the world of finance. We have all started to think beyond the norms, and to insist upon proper regulation, but there is still a lot left to learn.