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Banking crisis 10 years on

Banking crisis ten years on – a look back to 2007

August 28, 2017 9:00 am Published by

We still hear talk about austerity, and the Conservatives frequently comment on how the Labour government under Gordon Brown ‘bankrupted’ the country. Which would give us cause to think the economic crash was only a few years ago.

But rather incredibly, ten years has flown since the fateful August of 2007 when the first indicators that the global economy was under strain hit the press.

The then Chancellor Alistair Darling – new to the job – was on holiday when he read a report on the front of the Financial Times about a French bank, BNP Paribas, which had been forced to close two of its hedge funds, admitting they were in effect worthless.

There were similar problems at some second-tier German lenders.

That date was August 9, generally recorded as the day that it dawned not only on Alistair Darling but leaders around the globe that something was seriously wrong.

The closure of the BNP Paribas funds sparked a sharp escalation in the cost of credit for all banks, created a panic in financial markets, and led directly to all the other tumultuous events of the next year – the run on Northern Rock, the demise of Lehman Brothers, and the bailout of Royal Bank of Scotland and Lloyds/HBOS by the British taxpayer, at the cost of tens of billions of pounds.

Who can forget those images of people queuing to get their money out of Northern Rock. A bank run? In the 21st Century? Surely not ….

The situation kept spiralling and, as we know, led to a period of austerity which we are still, to an extent, living with. CityAM has an excellent timeline, if you’d like to remind yourself of the chain of events.

 

Were there signs of a banking crisis?

 

In hindsight, and perhaps even at the time, there were certainly clues about what was about to happen. In January 2007, HSBC warned about a sharp rise in mortgage defaults at its US offshoot, a lender called Household.

Household had specialised in the ‘sub-prime’ loans that eventually triggered the crisis.

About the same time, the Financial Services Authority produced a report questioning the business model of Northern Rock.

In June of 2007 came a much clearer warning sign. Bear Stearns, a Wall Street bank, had to stop customers withdrawing money from two of its investment funds. The funds had specialised in the financial products that had been created on the back of those sub-prime mortgages.

There was a similar crisis at Lehman Brothers, another Wall Street bank, that had piled aggressively into investment banking and trading. It went under in September 2008. Bear Stearns was saved by a merger, or it too would have folded.

 

Where are we now?

 

There is certainly more regulation of banks, to try to prevent a similar crisis happening. But if you’ve seen the film The Big Short – an entertaining portrayal of the sub-prime lending fiasco – you’ll know that some people have little faith in this.

As regards the economy, we’re still awaiting a date for the post-Election Budget, where Chancellor Philip Hammond may throw a few bones, or equally may take a few things back. We will watch with interest.

In the meantime, while savers still suffer low interest rates (and borrowers enjoy them) there is always scope to explore different ways of saving and investing to get the best return on your money. Why not get in touch with the team here at Hartsfield to chat about a financial review.

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This post was written by Melanie Dolphin

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