This website uses cookies to ensure you have the best experience. Learn more

The Financial Crisis And Uk Bank Scandals

1273 words - 6 pages

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...

Find Another Essay On The Financial Crisis and UK Bank Scandals

Banking Bonuses and the Financial Crisis

2780 words - 11 pages The bonus culture & management incentives in banks were a key factor in the Irish and US Crisis. The system was flawed from the beginning; bankers took risks to get short term bonus, with no regard to long term consequences to the economy. Within the financial system the bonus culture is unique. The banks present a high percentage of it award based on bonus driven remuneration. For the employees of the bank it became a high percentage of

The Global Financial Crisis and Its Impact

2217 words - 9 pages 1.0 The Global Financial Crisis and Its Impact The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In

The IMF, World Bank, and Third World Debt Crisis

2469 words - 10 pages about money, economic planning, etc, they would have a much greater chance of staying out of debt and not getting into the same situation again. Cancelling debt will not help in the long run, what will help is fixing the root causes of this crisis. The World Bank and the IMF do not help the third world get out of debt, as they are meant to, but rather keep them in their monumental debt with no ways of paying it back. Third World Debt is an issue

The 2008 Financial Crisis

1206 words - 5 pages , there are serious mistakes in the UK regulatory framework, which lead to the regulator mistaken estimation to the existing problems in the financial system. Example : UK Northern Rock was a British bank, which was best known for becoming the first bank affected by the liquidity risk seriously in 150 years, during the credit crisis in 2007.(脚注) The bank sought and received a liquidity support facility from the Bank of England,(脚注) following problems

The Global Financial Crisis

618 words - 2 pages in bailout packages and plans. An article on globalissues.org calls it “A Crisis So Severe, Those Responsible Are Bailed Out”. However, as easy as it is to blame the banks or the government, there is a missing idea in the protester’s ideology. This problem verily could have been averted. During the course of the 1990s and early 2000’s specialists in the financial fields had been highlighting these issues. Yet, it is a well-known fact that in

The Current Financial Crisis

856 words - 3 pages creating growth. When people lose confidence in the economy this activity freezes or weakens, consequently, asset prices decline, unemployment rises and companies default as was the case of Lehman Brothers in 2008. The freezing of the flow of money is a financial crisis. Today, the global flow of money is at risk. This risk is a result of Debt and Credit imbalances: "Persistent trade surpluses in some countries and deficits in others did not

The Global Financial Crisis

2812 words - 11 pages other hand if people want to check account at Citibank or Wels Fargo, they check account because this is an asset this is not a security. “Financial intermediary a financial firm, such as a bank, that borrows funds from savers and ends them to borrowers” (O’BRIEN, 2011). The worldwide financial crisis brew for a while, actually happening to confirm its consequence in the middle of 2007, approximately the globe stock markets have fallen, big financial

The 2008 Financial Crisis

1529 words - 6 pages the financial crisis. In an agreed move, central banks of several nations chose synchronized action to provide liquidity hold up to financial institutions. The scheme was meant to redeem the interbank market. By November 2008, the federal funds and reduction rate had been reduced to 1% and 1.75%, respectively (Angelides et al, 2011). Central banks in Switzerland, China, Sweden, England, Canada, Sweden, and the European Central Bank also decided

WorldCom and The Mississippi Scheme Scandals

1767 words - 7 pages WorldCom and The Mississippi Scheme are both large financial scandals that have occurred. WorldCom was a telecommunication company that overstated their cash flow by reporting $7.6 billion in operating expenses as capital expenses. WorldCom is the largest accounting scandal in US history as of March 2002. The Mississippi Scheme was a business scheme that destroyed the economy of France during the 1700’s. The scheme involved the loss of paper

The 2008 Financial Crisis

2612 words - 11 pages The 2008 financial crisis witnessed how fragile financial institutions and the whole financial system could be. In the U.S., lots of banks touched the edge of failure, requiring extensive assistance from the government. Some received bailouts in forms of capital injection or loss sharing agreement, while others entered shotgun marriage with healthier financial institutions arranged by Federal Deposit Insurance Corporation (FDIC). Among banks

The Global Financial Crisis

1000 words - 4 pages The global financial crisis has brought wide-ranging changes to consumer spending behaviour and consumption patterns throughout the world with the economic downturn impacting on the spending and purchasing power of people. The findings of a study conducted by Booz and Company in 2008 on consumer spending behaviour revealed that, firstly, the unprecedented confluence of the dramatic rise in oil prices, the substantial deterioration of housing

Similar Essays

The Bank Of England And The 2008 Financial Crisis

766 words - 4 pages Due to the 2008 financial crisis, the Bank of England employed quantitative easing (an unconventional monetary policy used to stimulate the economy) by cutting interest rates down to 0.5 % and has been keeping it until now. The Bank made the decision to keep QE and the interest rate unchanged in March. Spare capacity (the ability of a firm to produce more of a product than is now being produced) is used by the BoE to justify its use of forward

Bank Ceo Incentives And The Global Financial Crisis

3331 words - 13 pages -taking incentives did indeed lead to higher volatility. The only result that may be surprising at first glance is that of Fahlenbrach and Stulz (2010). Fahlenbrach and Stulz (2011) similarly focus on the crisis years to find that that CEOs with better incentives actually performed worse during the financial crisis. They argue that better incentivized bank CEOs took risks that their worse incentivized counterparts did not, yet they find no

Financial Scandals And Environmental Disasters Essay

839 words - 4 pages Due to financial scandals and environmental disasters, CSR has become a critical issue for companies who are demonstrating their commitment towards an ethical outlook and responsible behaviour by developing strategies which focus beyond profit maximisation, from the concern of wellbeing for employees to improving the community and the environment, in order to try minimising the damage caused by media coverage and increased transparency

Bank Of America And The Mortgage Crisis

1002 words - 4 pages Bank of America and the Mortgage Crisis Sharply rising mortgage foreclosure rates during the economic recession between 2007 and 2009 have drawn a significant amount of attention from scholars and policy makers. There has been an abundance of research probing factors, particularly sub-prime lending and neighborhood characteristics, contributing to foreclosures (Li). The present paper, investigated causes of the mortgage disaster with