2. Definition of 'Financial Crisis'
The Financial Crisis of 2008
is an ongoing global financial
crisis that is the worst the
world has seen since 1933
with the Great Depression.
A situation in which the value
of financial institutions or
assets drops rapidly. A
financial crisis is often
associated with a panic or a
run on the banks, in which
investors sell off assets or
withdraw money from savings
accounts with the expectation
that the value of those assets
will drop if they remain at a
financial institution.
3. Why the financial crisis of 2008 happened?
The answer is simple: the housing bubble
burst (U.S. subprime mortgage crisis)
What is subprime lending all about?
Subprime lending means giving loan to
people who may have difficulty in
maintaining the repayment schedule.
These loans are characterized by higher
interest rates, poor quality collateral, and
less favorable terms in order to
compensate for higher credit risk.
4. Lending decisions by
Financial Institution
Borrowing decisions
by individuals
Housing
Bubble
Formation
The “housing bubble burst” in 2006-07, as prices plunged (fall) downward in
the Sunbelt (U.S). Many speculators and homeowners could not meet their
payments, especially those who had "sub-prime" mortgages because their
income was too low to support the eventual monthly payments, or who had
adjustable rate mortgages where the monthly payments started small then
escalated.
5. What Were The Effects of Financial Crisis on UK
In the UK there was a large fall in retail sales, businesses already hit by falling
sales and profitability, faced increasing problems in securing bank support for
continued trading.
Several well known brands either went out of business or had to close a
substantial number of outlets.
Unemployment rose, especially in the 18-24 age groups. Falls in retail sales and
rises in unemployment mean falling taxes revenues for governments
worldwide.
In the 4th quarter of 2008 UK Gross Domestic Product (GDP)* fell by 1.5%
and the country officially entered a period of recession. The recession
continued through 2009. However signs of recovery became apparent in the
final quarter of the year, with GDP growth of just 0.3%.
At the time of their respective failures, the Northern Rock was building society
trying to act like an investment bank and Lehman Brothers was an investment
bank trying to act like a building society!
6. Course Of Slowdown
DATES DURATION REAL GDP
REDUCTION
2008 Q2
1.25 years
(5 Qtr.)
-0.2%
2008 Q3 -1.7%
2008 Q4 -2.2%
2009 Q1 -1.8%
2009 Q2 -0.3%
7. Statistical Data to Prove The Slowdown
UK annual house price rates of change
12-month percentage change
The graph above shows that UK's house price decreased sharply from 2008 to 2009 by
25% after financial crisis and moved up until the middle of 2010, and then decreae to the
average point in 2011.
8. House price changed in UK from 2008 to 2011
The figure shows the change of house price around UK between 2008 and 2011. Obviously all regions' average house
price dropped remarkably in both 2008 and 2009, even more serious, high level house bubble exacerbated Northern
Ireland's house price fell prominently. Since its average house price rose sharply before 2007 which is the fastest house
price increased and highest average price in the UK outside London and south east. Poorly, figure 6 gives the
information about Northern Ireland's house price that decreased around 35% in two years while its averge house
price became the lowest of any region in the UK.
9. Total UK Exports, Imports and GDP, 1980-2009, Million USD
It reveals that UK's unemployment rate in 2011 almost equal to the figure in 1992's recession.
Some economists are suggesting the government to deal with this issue by imitating the rescue
solutions in 1992 (drop UK's foreign exchange rate) to stimulate UK's financial market.
10. British sterling exchange rate (2002-2012)
As we can see from the figure above which the sterling and US dollar currency pair
exchange rate is based on yearly changing. between 2002 to 2012. The sterling
exchange rate towards US dollar on 5th Nov 2007 is 2.12$/£ which decreased
dramatically to 1.35$/£ on 19th January 2009, GBP sterling dropped nearly 7700
points, 27% within one year and a half, the largest decline since 1971.
11. Impact of Financial Crisis on India
India was comparatively insulated from GFC of 2008. Reasons :
1) A very strong and effective market regulators -RBI, SEBI, and most importantly
FMC(Forward Market Commission - regulates commodity derivatives and futures)
2)Lot of Indian sector at that time were not open to FDI. Indian growth story was fuelled by
home consumption and FDI contributed only 10% (even now) in total capital asset creation.
3)India felt the heat when due to GFC, Euro and later global meltdown happened .. this affected
exports and thus balance of Payment, CAD and thus Indian govt started to cut down on
expenditures (capital as well as revenue). This further led to slow creation of direct productive
assets that further created less capital and employment in the economy
So immediate impact of GFC 2008 wasn't that great but India felt the heat later from 2012 and
onwards
GDP growth rate in 2007-08 -9.3%
2010-11 -7.5% .
2012 -13 -5% ( we started to slow down when other countries were recovering)
12. Measures Taken By UK Govt.
Recapitalization gave banks the capital they needed to remain in operation, while loan
guarantees helped to ease conditions in the money market. However banks still sought to
strengthen their balance sheets by reducing lending, so creating a severe credit squeeze.
This had adverse effects on both companies and households, which found bank finance hard to
obtain. The squeeze on bank credit persisted despite the deep cuts in the Bank rate and
forecasts for GDP growth in 2009 were cut back to minus 4.0 per cent, confirming that the
economy was heading for a severe recession.
Further measures were introduced on January 19th to relieve the situation.10 The Bank
announced a new Asset Purchase Facility (APF) to buy up to £50bn of commercial paper and
other securities in exchange for Treasury bills.
A second measure provided for the issue of £50bn Asset Backed Securities for new mortgages,
bearing government guarantees.
The third measure was the most controversial because of the potential obligations falling on the
taxpayer. It was announced on February 26th that Government insurance was to be made
available to banks against future losses on toxic assets under an Asset Protection Scheme (APS).
13. Royal Bank of Scotland and Lloyds Banking Group, both substantially nationalized under the
recapitalization provisions of the Darling Plan, participated in the scheme, and the Treasury
insured £585bn of their holdings of toxic assets.
The Asset Protection Scheme was intended to reduce banks’ fears about exposure to toxic assets
and to encourage them to increase lending to companies and households. Both banks
participating in the APS gave formal undertakings about increasing their lending (Bank of
England, 2009). The insurance of losses on toxic assets under the latest UK proposals has been
criticized because of the risk to which it has exposed the taxpayer.
However, the Bank’s scheme has encountered less difficulty than the plan, introduced by
Geithner , the newly appointed US Treasury secretary in the Obama administration, to replace
the Paulson Plan. Under the revised plan the TARP has been used to recapitalize banks, either
through government assistance or through the injection of additional private funds, while toxic
assets are to be dealt by the PPIP (Public-Private Investment Plan), which is due to start in July.
The plan has not resolved the basic issue of the valuation of toxic assets held by banks, which
are to be purchased by private agents with public financial support. Banks are likely to resist
selling assets cheaply, but potential purchasers will only be induced to purchase assets if prices
are attractive.
14. Conclusion and Learning outcomes
How did it come to pass that in 2008 our nation was forced to
choose between two stark and painful alternatives — either risk
the collapse of our financial system and economy, or commit
trillions of taxpayer dollars to rescue major corporations and our
financial markets, as millions of Americans still lost their jobs,
their savings, and their homes?
The Commission concluded that this crisis was avoidable. It
found widespread failures in financial regulation; dramatic
breakdowns in corporate governance; excessive borrowing and
risk-taking by households and Wall Street; policy makers who
were ill prepared for the crisis; and systemic breaches in
accountability and ethics at all levels.
