Prior to the weekend of September, 2008, when the bankruptcy of Lehman Brothers initiated a global economic crisis on a scale unseen since the Great Depression, UK banks were respectable and successful institutions. Four of the top ten companies in United Kingdom for 2007 were banks. Even banking institutions which were less fortunate in their transactions managed to declare encouraging balance sheets by the turn of the year. The major banks had a combined market equal to the Gross Domestic Product of Argentina, and the future looked bright indeed.
But the credit crunch turned everything upside down, hitting hard British banks at a time when profits were at their peak. Thus, after the credit crunch, the pre-tax profits of Halifax Bank of Scotland dropped by 72 %, those of Lloyds TSB - with 70 %, at Barclays and HSBC, the slump in profits amounted to 33% and 28%, respectively. Northern Rock had to be completely bailed out by the British government, so that taxpayers’ money, deposited in it, did not vanish up in smoke.
So, what did it go wrong with the British banks? Well, first and foremost, they should take the blame - simply put, they just lent too much money to their clients, worrying too little if it could be paid back.
Secondly, banks firmly refused to step up and take responsibility for their failures - they simply passed them on to others. Thus, for example, the main concern of banks with regard to mortgage loans was not how to recuperate the loans but, instead, how they could be sold on the open market to other banks.
But it was not just the banks that were instrumental in the creation of the financial crisis. The local government and the Bank of England are to share the blame, just like other state political and financial authorities around the world. It was these authorities, which contributed to the establishment of an unhealthy market environment, where bank financiers were encouraged to take big risks on the stock market, knowing that if risks flopped, state institutions will cover their backs. However, the big risks, taken by the financiers, turned sour and entailed big losses for the banks in Britain.
These are the main reasons, leading to the shakedown of the British banks. Survival was secured by the timely intervention of the British government (as of 8 October 2008), which literally payеd for its contribution to the economic mess, now announcing a rescue package to the amount of £ 500 billion. The sum would be invested in endangered banks by buying out their shares. Banks were thus allowed much-needed funding, security in their dealings, and the confidence of ordinary people, whose deposits were now to a great extent guaranteed. Among the banks, which have availed themselves of the state financial injections, were well-established institutions such as Abbey, Barclays, Lloyds, and Halifax Bank of Scotland. In return for the government investments, the banks agreed to restrict the executive pay and dividends to their shareholders, as well as to grant only well-secured loans to private individuals and small businesses.
This initial - and pivotal - intervention of the British government was followed by a second bank rescue package of £ 50 billion, announced on 19 January 2009, and aiming to provide banks with additional funds for loans.
The banks themselves have learnt many lessons. In the past year, there is clear evidence that they have become more cautious in their dealings, making safer investments, borrowing better-guaranteed loans and, in general, carrying out their transactions more prudently.
As a consequence of all this, the position of British banks has been stabilized to a large extent; they are, once again, able to provide the funds needed by businesses for their operation. This, in turn, boosts up the national economy and gives hope that the financial crisis, which we are going through at the moment, may soon be over.