The Financial Crisis and UK Bank Scandals
In September 2007 the UK banking industry began exhibiting symptoms of the financial crisis that started in America in 2006. Northern Rock was in trouble and had to ask the Bank of England for help. When news of this got out customers started queuing around the block to withdraw their money. In 2008 Northern Rock was nationalised, and in 2012 it was bought by Virgin Money.
Today the banking industry can be seen to be on the road to recovery. But on that road there have been potholes of controversy. I'm thinking Libor, excessive bonuses, payment protection mis-selling and foreign exchange manipulation, to name a few.
But before we look at those in ...view middle of the document...
But as defaults increased the value of these securities decreased.
Banks tried to cover their risk on these CMO's by buying insurance against default, using an instrument known as a credit default swap. The sellers of these swaps then covered themselves against the risk of the swap they'd just sold by buying yet another credit default swap. It was getting complex. When mortgage defaults caused a drop in the value of collateralized mortgage obligations, the credit default swaps had to pay up, and banks started seeing significant losses. The reduced liquidity led to a freeze in trading of CMO's, then the banks stopped lending to each other altogether.
Enter Northern Rock, who needed this short term lending to maintain business as usual. We know what happened to them subsequently. Banks all over the world were suffering losses by this stage, and headlines were made when US bank Bear Stearns had to go to the Federal Reserve for funding. They were taken over by JP Morgan shortly afterwards. Then the floodgates opened, with the bankruptcy of Lehman Brothers in 2008 prompting a consolidation of banks (Lloyds bought HBOS, Bank of America bought Merrill Lynch). The whole financial system was under such a strain at this point that government intervention was required.
The UK government propped up Lloyds/HBOS and RBS with around £37 billion of taxpayer's money. Interest rates were cut from 5% in September 2008, and by March 2009 they were at 0.5%. At the same time guarantees were given to savers that their deposits up to £50,000 would be covered (now £85,000). In 2009 further government support was needed, and according to The Independent the bill was up to £850 billion by December of that year. The Bank of England began its quantitative easing program in March of 2009 to pump more money into the system, and since 2010 some stability has returned to the banking sector.
Of course businesses suffered from the lack of lending during the crisis, and ordinary people were affected as a result. The public trust in banks took a knock, and people were less than pleased that it was billions of pounds of their taxes that bailed out the 'irresponsible bankers'.
Public perception has continued in a negative vein, fed initially by the revelation that banks continued to pay exorbitant bonuses on both sides of the Atlantic during the bailout period. In the U.S. it was reported that nine banks paid out $32.6 billion in bonuse in 2008, while at the same time receiving $175 billion in government aid. In the UK around £12 billion was paid in bonuses in 2008. The continuing disquiet about the level of bonuses paid led to the European Union legislating a cap on bonuses. However, banks and other...