Northern Rock : Signs Of The Global Crisis

Before the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the general conception of government safety nets, the United States banking industry was quite different than it is today. Depositors assumed substantial default risk and even the slightest changes in consumer confidence could result in complete turmoil within the banking world. In addition, bank managers had almost complete discretion over operations. However, today the financial system is among the most heavily government- regulated sectors of the U.S. economy. This drastic change in public policy resulted directly from the industry’s numerous pre-regulatory failures and major disruptions that produced severe economic and social

Financial Crisis of 2007-2008 originated in the United States spread to the financial systems of many other countries, including CIS countries, by means of the domino effect. Bankruptcy of one of the largest Americans Bank, Lehman Brothers Holdings PLC, in someway was a launcher of this global crisis the scope of that can be compared with the Great Depression of the 30s of the last century. No one could have even believed that a crisis in the local market of subprime mortgage loans in the USA would have such enormous affect on the financial systems over the world and crash banking sectors of many countries one by one.

The financial crisis in America had spread to Europe. Banks in the UK bear the greatest impact from the credit crisis sub-prime housing loans in the U.S. For example, Northern Rock Bank had a bad debt account of up to 191.6 billion U.S. dollars in July 2008 and the Bank of England had to pump 27 billion pounds to rescue Northern Rock Bank. At the end of September 2008, there were some other big banks in Europe such as Dexia and Hypo Real Estate falling in the crisis and these banks were rescured by the governements throught financial bailout. (Alexander, 2008)

The lack of money became so bad in the US, UK, and Ireland, that the government had to bail them out. the realization of all this by the public lead to a complete loss of confidence by consumers and investors all around, this lead to less spending and investing. all this lead up to something called a credit crunch. a credit crunch is a sudden shortage of funds for lending. the credit crunch was driven by the bad handling of loans on mortgages that led to a rise in defaults and sub prime mortgages. these mortgages were in america, but the downturn was able to spread throughout the entire globe. people with poor income and poor credit were getting huge loans for mortgages that they werent able to pay back. a cause for this was probably due to the huge incentive for mortgage brokers to sell mortgages at high prices because that's how they got paid, and that played a huge roll in the rise of mortgage defaults. mortgage broker borrowed money to be able to lend mortgage, the lending was not financed out of savings accounts. for many of these mortgages, there was a 1 to 2 year period of low interest rates, at the end of these periods, interest rates rose dramatically, not allowing people to afford the mortgage

The current economic-financial crisis was indeed caused by the simultaneous occurrence of events in different parts of the world that all had a negative effect. These events are subtly different and therefore it is common that only one event is held responsible for the crisis. In reality, the world economy became critical due to the mix of four major events: 1) the unrestrained greed of financiers in the U.S. and U.K., which transformed bad mortgages into toxic financial assets 2) the habit of getting deeply indebted in the U.S. and U.K., 3) the excessive liquidity in Europe, 4) the real estate bubble in the U.S. and some European countries (Thomas, 2011) At the beginning of the financial collapse in the United States, many commentators, among which was the President of the Federal Reserve, hastily affirmed that the situation would only affect the United States and at most, the UK, where the banks,

As part of the Financial Services and Markets Act 2000, the FSAs sole purpose are to meet their four objectives: maintain market confidence, enhance financial stability, protect the consumer and reduce financial crime. By not implementing rules, doing enough investigations and enforcing power, the FSA has failed to meet all these objectives. Trust was lost in the UK Financial system when the LIBOR scandal went public, banks revealed themselves to not be as financially stable as what they portrayed to be, a number of consumers got scalped by the manipulation and the LIBOR scandal occurred as one of the biggest financial crime that has yet to send individuals to jail. As a regulator that failed to meet all of its objectives, the FSA had a responsibility in the LIBOR scandal. Being the UK’s central bank, the BoE’s mandates were to provide monetary stability and financial stability. Even if this body does not oversee banks’ compliance with regulations, the scandal led to monetary and financial instability, which should concern the BoE. In fact, Diamond testifies against Paul Tucker, the deputy governor in charge of financial stability for the BoE. Diamond claims Tucker implied the LIBOR rate is high and should be lowered.

This almost brought down the world’s financial system, and threatened the collapse some of the large financial institutions. Which luckily was prevented by the bailout of banks by national governments, but left the stock markets to fend for themselves, thus causing global drop. It took huge taxpayer-financed bailouts to shore up the industry. Even so, the ensuing credit crunch turned what was already a bad turn out into the worst recession in 80 years. In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. The American economy is built on credit, and because of this credit went unchecked and got out of control. Many people were taking out loans, mortgages became simple. Many people got rich and wanted more. Banks made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loans. The housing market eventually declined, causing massive losses in mortgage backed securities. Many banks and investment firms began losing money. This also caused a massive amount of homes on the market which lowered housing prices and slowed

The two largest modern bank runs in American history were the Savings & Loans Crisis of the 1980’s and the Financial Crisis in 2008-2009. Both crises left permanent scars on our financial system and provide important lessons moving forward. In this paper, I will provide a comparative analysis of the various causes, economic effect and regulatory responses, in an attempt to perhaps display a pattern for these crises that we can lean on to prevent future ones. Ultimately, the analysis yielded that at the core both crises were caused by regulatory negligence, attempting to cheat the system and government policy mistakes regarding financial policy, all contributed to the rise of these crises. Both had detrimental economic effects, and both regulatory

The subprime mortgage crisis had a global economic effect, but the worst was seen here in the United States. Millions of americans were affected, many lost their jobs and homes, and the economy was on the brink of collapsing

September 15, 2008, the bankruptcy of the investment bank Lehman Brothers, and collapse of the world’s largest insurance company AIG, triggered a global financial crisis. This major fallout was catastrophic; it cost the world tens of trillions of dollars, rendered 30 million people unemployed, and doubled the national debt of the United States. Unfortunately for everyone else, this crisis was caused by an out of control industry. Since the 1980’s this industry has been feeding from the rise of increasingly severe crisis’, each one causing more and more damage. The investment banks went public and stock and bond workers on Wall Street were getting rich. In 1982, the Reagan Administration deregulated savings and loan companies allowing them to make risky investments with their depositor’s money. By the end of the decade, hundreds of these loan companies had failed, costing taxpayers $240 billion dollars and their life savings; otherwise known as a “bank heist”. An example of one of these investment loan companies was Ctitigroup (the largest financial services company in the world). There was an ongoing merger in 1998 between Citicorp and Travelers that violated the Glass- Steagall act, a law passed after the Great Depression so there could be no risky banking activity. Alan Greenspan under the Reagan Administration, ignored it and said nothing. In fact, a year later, with the urging

The Global Financial Crisis, also known as The Great Recession, broke out in the United States of America in the middle of 2007 and continued on until 2008. There were many factors that contributed to the cause of The Global Financial Crisis and many effects that emerged, because the impact it had on the financial system. The Global Financial Crisis started because of house market crash in 2007. There were many factors that contributed to the housing market crash in 2007. These factors included: subprime mortgages, the housing bubble, and government policies and regulations. The factors were a result of poor financial investments and high risk gambling, which slumped down interest rates and price of many assets. Government policies and regulations were made in order to attempt to solve the crises that emerged; instead the government policies made backfired and escalated the problem even further.

The “Great Recession” is commonly used to explain the massive economic contraction that occurred in the United States during the fourth quarter of 2007. However, the actions of the United States spanned to other nations, leaving massive effect on the global economy. One nation that took on serious financial burden during this recession was the United Kingdom. This nation first faced the effects of the Great Recession beginning in the first quarter of 2008. Overall, the initial mass effects on the nation can be attributed to the nation’s reliance on the financial sector. In fact, after partially stabilizing in 2009, the country struggled with a double-dip recession between 2010-12, and continues to struggle with some of these effects.

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.

This report will examine the affects of the global financial crisis, which was a result of the collapse of the sub-prime mortgage market in the United States, on the UK economy. First of all, it will look at the background of the global financial crisis. Secondly, this paper will analyses why the UK economy has been influenced by the global financial crisis, what effects of the financial crisis on the United Kingdom have been, especially labour market. Lastly, brief conclusions will be drawn and a number of recommendations will be made.

Alas, due to the worsening financial markets and inadequate regulatory oversight, Northern Rock was finally nationalized as the financial crisis claimed one of its largest victims in the ensuing aftermath.