ECONOMICS

UK Banking Sector and Current Economic Downturn



UK Banking Sector and Current Economic Downturn

The financial crisis of 2008 imposed significant monetary pressures on the world financial markets including United Kingdom as a dominant affected among these. The United Kingdom banks cannot recoup their loans by selling the homes because the value of them dropped and became less and the loan amount. This creates losses for these banks. The securities sold in the financial markets saw their value drop. This creates losses for financial institutions who bought them, which created the subprime crisis and a freeze in financial markets.

On the other hand, the United Kingdom, increasing real estate allowed people to obtain new loans. For example, someone bought a house £150,000. He took out a mortgage for that amount. Two years later, the value of his house doubled (which is hardly an exaggeration). It can borrow again, increasing the mortgage on his house. This fed the demand, and the U.K. growth of consumption (Chen, Zhiwu, Knez, 2002). Moreover, even apart from this kind of mortgage, credit was easily granted in the United Kingdom. Households have finally reached their limit of reimbursement. This causes an increased risk of default for banks, so additional provisions, thus further implemented. In the light of the above observations, it is necessary that we study the implications of the crisis on the UK banking sector, especially after the introduction of banking regulations followed by the crisis. The banks' difficulties, problems with repayment of U.K., all this leads to a tightening of credit conditions in the U.K., so a decline in general consumption in the United Kingdom (Ayers, 2008, 6-15).

The fixed effect consequence highlights that the recent credit crisis has adversely affected the leverage ratio of private firms. This effect is most significant on short term financing channels such as short term debt and trade credit. As a consequence, private firms hold cash and issued equity to hedge the negative effect of credit contractions. We do not, however, find evidence that private firms substitute to net debt issue or net trade credit nor do we find that private firms scale back shareholder distribution to preserve their financial slack. The results further highlight that credit contraction has negatively affected the performance and investment of private firms. Moreover, the increase in cash reserve and decrease in investment suggests that funds raised through equity finance may have been used to finance the cash balances. Overall, the results highlight that financial and investment policies of private firms are susceptible to variations in the supply of credit

There are various organizations in the United Kingdom that monitor the markets and banks. Importantly, this process of increasing property prices driven by the credit was in full view of everyone. It was not a hidden process. Similarly, the fact that rising house prices fed the consumer credit was also a highly visible and recognized phenomenon, which has not been discovered after the crisis. The increased value of housing wealth gave them the purchasing ...