WHAT ARE FACTORS DETERMINING UK BANKS SURVIVAL IN THE 2007-2009 CRISIS?

WHAT ARE FACTORS DETERMINING UK BANKS SURVIVAL IN THE 2007-2009 CRISIS?

The 2007 to 2009 financial crisis started in the United States caused by the housing bubble which peaked in 2005 and dropped very significantly in 2006-2007 (Dikipedia, n.d.). The crisis impacted the US and the UK more significantly as reported by the IMF Financial Stability Report of 2008 (Singh, 2011). The crisis in the US affect the UK because both economy use the same business model “originate to distribute” which UK saw effective and adopted it in their financial sector (Eubanks, 2010). The problem with the 2007 to 2009 financial crisis was foreseeable however its impact was profoundly massive and cannot be contained by even the large banks in the UK. The only recourse of which is state intervention. This poses the risk of moral hazard especially if the state bail-outs collapsing banks affected by the crisis using taxpayer’s money. (Singh, 2011)

Northern Rock. The first victim in Europe was Northern Rock in the UK. The Northern rock is a medium sized bank whose nature is highly leveraged. The impact of the US 2007-2009 crisis on the bank, made it seek security from the Bank of England, the news of which however led to panic and bank run in the middle of September 2007. The British government, who ignored earlier calls, and unable to find a prospective private buyer, later nationalized the bank. The other casualties in the financial crisis are century old big banks which have a history of surviving several market crashes. These banks have a significantly large deposit base which is the weakness of Northern Rock. But anyone had seen that the large deposit was not enough to cushion the impact of the financial crisis. (Singh, 2011)

Bradford and Bingley. When confidence in the housing market sector dropped this bank suffered. It tried to recapitalize its business with rights issue but market confidence all the more significantly dropped which led also to the collapse of its credit rating. A bank run ensued much like the one that happened in Northern Rock. The UK government nationalized the bank and sold off parts of it to Santander Spain. (Singh, 2011)

The Royal Bank of Scotland. The RBS has made several acquisitions as part of its expansion – it grew and become a large financial conglomerate, with its acquisitions of Natwest in the year 2000 with the Greenwich Capital (along with it), in 2007 it acquired ABN Amro and this was the start of RBS’ losses. The acquisition of ABN Amro has a lot of problems because its underperforming assets pushed further RBS’ bubble. (Singh, 2011)

Halifax Bank of Scotland. Even during financial crisis of 2007, and the market collapse that resulted from it. HBS still expanded on its corporate property and retail business. HBOS issued rights but it has failed to attract interests from investors. Lloyds TSB however took-over the bank. The take-over of Lloyds TSB was approved by the government to safeguard financial stability. (Singh, 2011)

Northern Rock, Bradford and Bingley, The Royal Bank of Scotland and Halifax Bank of Scotland survived through government intervention. When banks and financial institutions collapse under a big financial crisis government intervention is imperative. In the UK there are three authorities that were established to maintain financial stability. Called, the UK Tripartite Authorities, they are The Treasury, Bank of England, and the Financial Services Authority. Their responsibilities were laid out in a Memorandum of Agreement in 1997 and later revised in 2006. The primary responsibility of the Treasury is on legislation and regulation. The Bank’s responsibility is on monetary policy function and “emergency liquidity support” as a Lender of Last Resort (LOLR). FSA on the other hand is the financial regulator that monitors the financial institutions. (Singh, 2011) The multifaceted strategy that the state employed during the 2007 to 2009 Financial Crisis as discussed by Singh (2011) are the following:

Blanket Guarantee. This refers to financial support to financial systems that are in need either before or during the crisis to help them cushion the impacts of the crisis. The issue with the blanket guarantee lies on the confidence of the public whether the authorities can recoup the repayment of taxpayers’ money from the banks.

UK Government Asset Protection Scheme. This scheme comes in the form of government insurance to financial institutions to help them protect their assets against potential loss.

UK Financial Investments. This is a separate legal body that checks the relationship between the government and the banks it invested in such as the Bradford & Bingley, Northern Rock, Royal Bank of Scotland, and Lloyds TSB/Halifax Bank of Scotland.

In conclusion only the government with its multi-faceted tools and holistic strategy can contain crisis of systemic proportions as the 2007 to 2009 financial crisis. It is the state’s intervention that help UK banks survive the financial crisis.

REFERENCES

Dikipedia, nd. Financial Crisis of 2007 to 2009. [online] Available at: < http://dks.thing.net/FinancialCrisis2007%E2%80%932009.html> [Accessed 5 May 2011].

Eubanks, WW, 2010. The European Union’s Response to the

2007-2009 Financial Crisis. Congressional Research Services Report for Congress. [online] Available at: < http://www.fas.org/sgp/crs/row/R41367.pdf> [Accessed 5 May 2011].

Singh, D. UK Approach to Financial Crisis Management. [online] Available at: < http://www.uiowa.edu/~tlcp/TLCP%20Articles/19-3/Singh.finalfinal.jyz.121610.pdf> [Accessed 6 May 2011].