The Impact Of Financial Crisis On The Uk Economy

We all know from our course that leverage and liquidity risks of financial institutions are vulnerable to the crisis. The financial crisis that emerged in 2007 had many and varied causes, but one of its most

Recent studies have investigated the impact of the 2007-2009 financial crises on banks’ capital. Berger and Bouwman (2011) emphasised the importance of capital during financial crisis. Their empirical study concludes that banks with solid capital base have some benefits during the crisis than those that are poorly capitalised. Well capitalised banks are more able to withstand the shocks due to liquidity squeeze, and therefore had higher chances of surviving the crisis period. Other benefits accrued to well capitalised banks include increase in their market share and profitability, as customers withdrew their funds from less capitalised to a well-capitalised banks. This conclusion was also reinforced by a recent empirical study conducted Olivier de Bandt et al (2014) on a sample of large French banks over a period of 1993 – 2012. Similarly, Gambacorta and Marques-Ibanez (2011) demonstrate the existence of structural changes during the period of financial crisis. They conclude that banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. Using a multi-country panel of banks, Demirgüç-Kunt, Detragiache and Merrouche (2010) find among others results, that during

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.

2009 October 9, a conference hosted by UK Financial Services Authority referred to the liquidity management in HSBC Bank, seen from the statistics of annual report of HSBC, this bank did not suffer a great impact of 2008 financial crisis. Analysts focus on the efficiency of HCBS model, make some general experiences that banks can learn from the HSBC bank (Choudhry, Landuyt 2010). In fact, the HSBC model did not was a very specific model to rescue the bank in liquidity management risks, it consists some very basic principles in banking and liquidity risk management. It is a more robust risk management method so that banks may back to a more conservative business model, whether it is the bank’s own choice or the central bank’s regulation. There are 9 general principles to apply in the liquidity management and banking system.

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.

Basel III consists of a comprehensive set of reform measures intended to improve the regulation, supervision and risk management of the banking sector (APRA 2013). Being developed mainly in response to the credit crisis of 2007, it requires banks to maintain adequate leverage ratios and meet certain capital requirements. Basel III builds on the basis of previous Basel I and Basel II and is aimed at improving the banking sector’s ability to deal with financial stress and turmoil, strengthen the banking sectors transparency and improve risk management (Investopedia 2015).

Back in 2007 when the financial crisis hit, many banks were faced with liquidity crisis. This was because they had no short term assets i.e. cash. Only long term assets were available such as loans. This meant that if a bank had loaned £500,000 as a mortgage backed security to a homeowner, the bank was unable to ask for that money back until the maturity date which tends to be very long. Liquidity crisis became very apparent in 2007 and as prior to 2007 banks saw short term lending less profitable and long term lending such as mortgages highly profitable. And when the financial crisis hit money markets absorbed up and many banks did not have access to sufficient cash which had a huge effect on consumers causing a panic and a ‘run on the banks,’ this gave consumers the understanding that banks were unable to meets it financial commitments. As this happened, around the world central banks were injecting short term liquidity into banks hoping faith and confidence is restored within the banking industry.

In 2008 the world economy faced the worst global financial crisis since the great depression of 1930’s. The impact of the crisis on the banking industry was critical during this period. From 2007, bank runs began on several British and American major banking firms, but instead of the classic bank run it was as described by Gorton, G. and Metrick, A. (2009) ‘a run on the shadow banking system’. This period was characterised with failure of major banks across Europe and the US. This financial crisis resulted in few takeovers in backing sector and forced governments to rescue the global financial market. In this essay I will discuss what happened during the financial crisis of 2008-09, why it happened, and what questions researchers have

As a consequence of that the need arises for a regulation directly proportional with the extravagant risks banks take. This regulation is called the Capital adequacy regulation where banks are obliged to hold more capital as they increase the asset risk weight. It is calculated as the ratio of capital to the weight of the asset risk. Where the capital of the bank falls in two categories first, tier one capital which consists of shares representing stock holder’s equity ,reserves and retained earnings and the second type of capital is tier two consisting of tier one and other external sources (Bank for International Settlements Dec.2010).

The financial institutions have obligations to fulfill depositors’ requirement of withdrawing deposits. In addition, they need sufficient funds to invest projects and issue loans to make profit, which maintains a normal operation. Trade off exists between liquidity risk and profit. The ideal position is to earn high profit while minimum risks. As a result, liquidity management is important for the financial institutions to avoid risks of default.

Liquidity plays a key role in the uplift of a firm. Liquidity is a measure which represents the ability of a firm having

Capital in banks play an essential role of helping banks remain solvent by absorbing losses caused due to stress conditions. In this paper, we shall analyse how capital helps banks manage their risk, what led to banks failing during the financial crisis and what measures have been adopted to avoid (or better manage) such situations in future.

Basel I not only increases sensitivity of regulatory capital differences in risk profiles, in addition, it considers about balance sheet exposures when assessments of capital adequacy are undertaken(Ojo, Marianne 2011). However, the framework also discourages banks to keep liquid and low risk assets, and it is hard to evaluate whether the minimum capital requirements for banks do harm to their competitivesness or not and whether this framework increase competitives inequalities amongst banks or not.

THE EFFECTIVENESS OF THE BASEL REGULATORY FRAMEWORK ON BANK CAPITAL Bank activity is characterized by asymmetric information. Depositors cannot monitor the quality of banks’ assets and doubts on the solvency of banks might lead to panic and ‘bank runs’ (Llewellyn, 1999). If this should occur, depositors will be induced to withdraw their savings, causing a liquidity crisis for the bank that can potentially lead to the failure of the intermediary. Moreover, doubts regarding the solvency of one bank can create worries about Comparative Economic Studies A Tanda Capital Regulation and Banks’ Behavior 33 the solvency of other banks, leading to a generalized panic. Bank runs are considered as extreme events that are potentially highly disruptive.

Ensuring robustness of financial models and the effectiveness of all systems used to calculate market risk. Liquidity risk is the potential inability to meet the bank’s liabilities as they become due and are managed through caps on the net asset calculations in the various time buckets. Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. A long term impact of changing interest rate is on banks net worth since the economic value of bank’s assets, liabilities and off balance sheet positions get affected due to variation in market interest rates.