Banks and the Crisis
If anything has underlined the capacity of the capitalist system for severe crisis bordering on disaster, it has been the recent report of the Bank of England admitting that in the last two years it had to launch a multi-million pound “lifeboat” fund to support financial institutions on the brink of bankruptcy. Although the Bank has refused to reveal exactly how much was spent on the operation, the Guardian (27 May) reported that “City bankers believe that more than £1 billion may have been used to bail out fewer than 10 institutions”.
The Bank first realized the true extent of the banking crisis in October 1990 and soon went on red alert. It eventually came to believe that over one in six UK financial institutions were at risk from the crisis. This was primarily because the economic slump and the collapse of BCCI provoked what has been described as a “flight into quality”, or towards the big five banks, at the expense of other institutions dependent on the so-called wholesale market where deposits come primarily from professional investors, many of whom were also involved in the slump-ravaged property sector.
The Bank’s report claims that its actions to avert a major banking crisis followed what it calls:
“substantial withdrawals of wholesale funding from smaller banking institutions arising out of a number of factors, including the pressure on banks in major overseas markets, notably America and Japan, the earlier closure of a number of other small British banks, followed by BCCI, and the reactions to those events by local authorities and other places of wholesale funds.”
It is clear from the Bank’s report that a full 1970s-type banking crisis was a real prospect—and the report states that the Bank of England still has £115 million in provisions representing outstanding debts at risk.
Some of those banks bailed out by the Bank of England have since ceased trading. Some have effectively worked themselves out of a precarious position while others still depend on the facilities extended to them by the Bank.
Given the anarchy of the market system it is quite easy for a major financial catastrophe to occur under capitalism and shake the system to its roots. This has been amply demonstrated by the recent activities of the Bank of England, just as it was during the secondary banking crisis of the 1970s and, of course, during the major slump of the 1930s, which was exacerbated by the major banking crisis of 1932-3.
One thing is for sure—there can be no sustained economic recovery so long as corporate, personal and national debts are compounding at a rate faster than wealth production. Before the “green shoots” of recovery really start to grow there will have to be yet more bankruptcies, cheap takeovers and massive debt liquidation to ease the pressure on finance, investment and consumption. In truth, with debts in major capitalist states like Britain and the US at such unprecedented levels and with no really convincing signs of sustained economic recovery, the pressures on capitalism’s financial apparatus may be far from over.