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The sub-prime crisis, the credit crunch and bank “failure”: An assessment of the UK authorities’ response

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Abstract

On 8 October 2008 the UK Government announced a far-reaching plan to restore financial stability, protect depositors and re-invigorate the flow of credit to businesses and individuals in the UK. The £400 billion bailout plan embraced three elements: a massive expansion in emergency liquidity support from the Bank of England; recapitalisation of UK banks and building societies using taxpayers' money; and the provision of a Government guarantee of new short- and medium-term debt issuance made by UK-incorporated banks and building societies. This action proved necessary in the wake of continuing and substantial weaknesses in many banks' share prices despite the temporary ban on short-selling imposed by the Financial Services Authority. It followed two revisions to domestic deposit protection arrangements, and the adoption of a piecemeal approach to failure resolution which saw the eventual nationalisation of Northern Rock in February 2008, the nationalisation of Bradford and Bingley in September 2008 and the brokering of takeover rescues of Alliance and Leicester and HBOS by Banco Santander and Lloyds TSB respectively in July and September 2008, and of the Cheshire and Derbyshire Building Societies by the Nationwide Building Society in September 2008. This metamorphosis in approach to failure resolution by the UK authorities in response to the sub-prime crisis and the credit crunch – nationalisation by default to (part) nationalisation as the preferred course of action - is duly analysed in this article, as well as their proposals for banking reforms which still have to be agreed by Parliament.

Suggested Citation

  • Maximilian J. B. Hall, 2008. "The sub-prime crisis, the credit crunch and bank “failure”: An assessment of the UK authorities’ response," Discussion Paper Series 2008_14, Department of Economics, Loughborough University, revised Nov 2008.
  • Handle: RePEc:lbo:lbowps:2008_14
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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/SPCCreditCrunchfp.pdf
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    1. Charles Goodhart, 2007. "Liquidity Risk Management," FMG Special Papers sp175, Financial Markets Group.
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    Cited by:

    1. repec:eee:riibaf:v:42:y:2017:i:c:p:559-571 is not listed on IDEAS
    2. Yves Fassin & Derrick Gosselin, 2011. "The Collapse of a European Bank in the Financial Crisis: An Analysis from Stakeholder and Ethical Perspectives," Journal of Business Ethics, Springer, vol. 102(2), pages 169-191, August.
    3. Y. Fassin & D. Gossselin, 2011. "The collapse of a European bank in the financial crisis: an analysis from strategic, stakeholder, ethical and governance perspectives," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/726, Ghent University, Faculty of Economics and Business Administration.
    4. Akbar, Saeed & Rehman, Shafiq ur & Ormrod, Phillip, 2013. "The impact of recent financial shocks on the financing and investment policies of UK private firms," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 59-70.

    More about this item

    Keywords

    UK banks; banking regulation and supervision; failure resolution; central banking; deposit protection.;

    JEL classification:

    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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