8.1 Background To Consumer Protection Flashcards
Credit crunch
Global financial crisis, starting 2007
Cause 1 of the credit crunch
- Banks lent money to people who were likely to be unable to repay ( subprime mortgages)
Cause 2 of the credit crunch
Banks used money from their retail business ( current accounts , savings and loans for individuals rather that businesses) to pay losses made by their investment operations
-Sections of bank that buy stocks+ shares and complex + risky investments products
Providers didn’t have enough money to repay depositors
Cause 3 of the credit crunch
Uk market dominated by large banking organisations-“too big to fail”
Impact of their business shutting has disastrous effect to economy
Timeline : 2004
USA interest rates low (1%) many lebt mortgages to people with poor/ no credit history.
-subprime, high risk
Banks that provided these loans sold the mortgages on to other banks and organisations around the world as investments
Timeline: 2006
-USA interest rose 5.35% , many subprime customers couldn’t make their mortgage repayments
-Banks tried to sell the homes that the mortgages were secured, but so many available to buy = house prices dropping significantly
-Banks and organisations that bought the investment products lost large sums of money
-banks would normally borrow money from other banks, bus so many of them were impacted, lending greatly reduced
- many banks found it hard to access cash ( liquidity )
Timeline: 2007
-UK Northern Rock Bank unable to borrow money and turned to the Bank of England. Gave emergency financial support, reported by media
- 14 sept 2007 Alarmed customers tried to withdraw deposits ( run on a bank)
- 17 sept, NR guaranteed all deposits, hoping for reassurance and for them to leave money in the bank
Timeline: 2008
- 17 Feb NR nationalised
-15 Sept largest investment bank in USA Lehman Brothers became bankrupt - providers around the world lost money
Stock market process fell globally
-29 sept British bank Bradford and Bingley broken up, Mortgages Natiolalised - 13 Oct gov announced it was bailing out of large banking groups Halifax HBOS Lloyds and RBS by buying shares
Timeline: 2009
Feb, RBS reported losses of £24.1 billion
Responses to credit crunch
-Gov set up and Independent Commission on Banking to recommend how such a situation could be a spider in the future - included ways to withstand as future crisis and ensure the industry rather than the taxpayer bore the cost of any losses
Key recommendations of the Independent Commission on Banking
- improve regulation of providers
- make sure banks are able to absorb any losses
Make it easier and less costly to deal with banks financial trouble - reduce amount of risks banks take
- separate retail banking from investment banking
Financial services act 19 dec 2012
Regulation
Financial services (banking reform) bill 4 feb 2013
Structure of uk banking
- separate everyday baking activities from more risky investment bank activities e.g. trading in stocks and shares ( ring fencing)
- depositors who are covers under Financial Services compensation scheme must be repaid as a priority if the bank fails
- government will have powers to ensure that banks can absorb losses more easily e.g. keeping large reserves of cash
