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Your money and the financial system Page 4 The global financial crisis The financial crisis that began in 2007 prompted a major economic downturn around the world. Before the crisis, the global economy had experienced a long period of sustained economic growth with low inflation. Benign economic conditions with low interest rates led investors to search for higher returns on riskier investments, like mortgage lending to the rapidly-growing US housing market. The banks fuelled a credit boom that led to a big expansion in the size of the financial system. By 2007, lending by British banks had grown to five times the size of the UK economy. Standards of risk assessment and monitoring began to slip, amid an air of complacency among some investors. Bad debts in lending to the US mortgage market had been rising gradually for some time. In mid-2007, the emergence of problems at a small number of banks prompted a reassessment of creditworthiness and risk-taking across the financial system. Concerns spread rapidly to global financial markets, affecting the UK and other banking systems.
Page 5 In the UK, the high-street bank Northern Rock was badly hit by concerns over the quality of its business. In September 2007, its depositors began queuing outside branches to withdraw their money. This was the first ‘run’ on a British bank since the 19th century. Northern Rock had to seek emergency loans from the Bank of England. It was nationalised by the Government in February 2008. The crisis worsened during 2008 as the financial system cut back on the risky lending built up during the long credit boom. The position of many banks and insurers worsened, culminating in the high-profile collapse of the US investment bank Lehman Brothers, Bradford & Bingley in the UK and Hypo Real Estate in Germany. Bad debts increased The Bank of England responded with new measures to pump liquidity into the banking system. The Government provided large sums of public money to HBOS and the Royal Bank of Scotland. Problems spread rapidly Severe strains on the financial system tipped the global economy into recession as business confidence and demand collapsed towards the end of 2008.
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Your money and the financial system Page 4<br />
The global financial crisis<br />
The financial crisis that began in 2007 prompted<br />
a major economic downturn around the world.<br />
Before the crisis, the global<br />
economy had experienced a long<br />
period of sustained economic<br />
growth with low inflation.<br />
Benign economic conditions with<br />
low interest rates led investors<br />
to search for higher returns on<br />
riskier investments, like mortgage<br />
lending to the rapidly-growing US<br />
housing market.<br />
The banks fuelled a credit boom<br />
that led to a big expansion in the<br />
size of the financial system.<br />
By 2007, lending by British<br />
banks had grown to five times<br />
the size of the UK economy.<br />
Standards of risk assessment<br />
and monitoring began to slip,<br />
amid an air of complacency<br />
among some investors.<br />
Bad debts in lending to the US<br />
mortgage market had been<br />
rising gradually for some time.<br />
In mid-2007, the emergence of<br />
problems at a small number of<br />
banks prompted a reassessment<br />
of creditworthiness and risk-taking<br />
across the financial system.<br />
Concerns spread rapidly to global<br />
financial markets, affecting the<br />
UK and other banking systems.
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