Topic 8 - Consumer production

Question 1

What was a big reason for the credit cruch?

Answer 1

1) Banks lent money to people who were likely to be unable to repay
2) Banks used money from their retail business to pay the losses made by their investment operations

Question 2

2004 happening of credit crunch

Answer 2

1) USA interest rates were very low at 1%
2) Many US banks lent mortgages to people with poor or no credit histories (sub-prime market)
3) The banks that provided these mortgages sold the mortgages on to other banks and organisations around the world as investments

Question 3

2006 happening of credit crunch

Answer 3

1) USA interest rates increased to 5.35%
2) Sub-prime customers could not make their mortgage repayments.
3) Banks tried to sell houses but there were so many house prices significantly decreased
4) Banks and organisations that had brought investment products based on the sub-prime mortgages lost large amount of money
5) Banks were so impacted by the sub-prime mortgages or investments based on them that lending between banks was reduced

Question 4

What were the responses to the credit crunch?

Answer 4

The government set up an Independent Commission on Banking to recommend how such a situation could be avoided in the future

Question 5

What did the Independent Commission on Banking include?

Answer 5

Ways to make the industry, rather than the taxpayer, bore the cost of any losses

Question 6

What were the key recommendations of the Independent commission on Banking

Answer 6

Improve regulation of providers
Make sure banks are able to absorb any losses
Make it easier and less costly to deal with banks in financial trouble
Reduce the amount of risks the bank takes
Separate retail banking from investment banking

Question 7

What does PRA stand for?

Answer 7

Prudential Regulation Authority