Readers Question: I still dont understand why the credit crunch in US caused a credit crunch in UK? is it because banks in UK depend on US banks to borrow money?
Many UK Banks bought bundles of the bad mortgage debt from US mortgage companies (either directly or indirectly). Therefore, when the US mortgage defaults rose, many UK banks lost money. They had to write off bad debts and this caused a deterioration in their balance sheets. Because of the large write offs they have been trying to improve their balance sheets by lending less and encouraging saving deposits.
This caused interbank lending to freeze up. – Because everyone lost money nobody wanted to lend each other money. This increased the cost of interbank lending causing a fall in general lending.
This problem was exacerbated because many banks especially the former building societies like Bradford and Bingley and Northern Rock had lent a high ratio of their deposits. Northern Rock lent many mortgages by raising money on the money markets. Therefore, when the money markets froze up, Northern Rock ran out of funding. They couldn’t call in their long term loans (mortgages) and they were short of cash. This is when they had to ask Bank of England for funding.
Another problem is house prices. As banks stopped normal lending. Demand for housing dried up. This caused house prices to fall. As house prices fell, it caused even greater reluctance to lend as many homeowners were facing negative equity.
5 comments ↓
Well written summary of the cause of the recession, I watched an interesting documentary on it some time ago on iplayer. George Soros pointed out that the bankers that set things in motion (trading bad debt I think?) wouldn’t have been doing their jobs if they hadn’t…the program also highlighted that some people have done really well for themselves in causing the credit crunch and are now so rich that they are unlikely to feel the affects of it…
[...] More on causes of UK credit crunch [...]
That’s the credit crunch in a nutshell as I see it, however there is a lot of confusion about the credit crunch in relation to the global recession which can be viewed as separate although intertwined.
House prices ARE an issue and one that actually contributed to the crunch – a bad debt secured on property in a rising market is fine – when the security is being devalued at a rate of knots – that’s when the bad debts bring the banks down…. They were still idiots to buy those debts though – that’s the thing that I still don’t get!
Can anyone tell me who wrote this article please as i’d like to reference it for a piece of uni work!!
Thanks
Can anyone tell me the author of this article please as i’d like to reference it for a piece of university work!!
Thanks
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