FINANCIAL CRISIS

Effects of the Financial Crisis on Lloyds TSB

Effects of the Financial Crisis on Lloyds TSB

PART I

Financial Crisis

In 2001, to combat a recession, the Fed lowered interest rates drastically to encourage banks to make more loans in the hopes that increased consumer spending would prompt an economic recovery. Bank loans thus became very easy to obtain, especially for people purchasing new homes. Indeed, banks began providing mortgages to just about anyone who wanted them—even people with poor credit ratings, known as "subprime" borrowers (Lynn, 2011). 

Banks made extraordinary amounts of money from the rising housing market, using derivatives to trade pools of mortgages back and forth at constantly increasing prices, expecting that the values of the homes underlying those mortgages would continue to rise. In mid-2007, however, many of the subprime borrowers who had recently purchased homes became unable to pay their mortgages (Shiller, 2008). Millions of properties soon went into foreclosure, and housing prices fell. The largest banks in the U.K. lost billions of pounds (Taylor, 2009). 

The foreclosure trend became known as the "subprime mortgage crisis," and it began to retard overall U.K. economic growth. Both consumer confidence and personal spending started to decrease (Krugman, 2009). With many newly vacant homes and plummeting home values, the home-construction industry also experienced a sharp drop-off in activity, causing a further downturn in the U.K. economy.

Recent Financial Crisis Emergence

By the end of 2007, the country's economic growth rate had slowed to less than one percent, a worrisome sign for economists. The nation's job market contracted for the first time in more than four years, meaning that companies were eliminating jobs rather than hiring new workers. Home sales fell to their lowest level since the late 1990s (Shiller, 2008). In September 2008, the U.K. banking industry suffered a devastating collapse. Banks that had fuelled the growth of the British economy for years were financially devastated, precipitating trillions of pounds in losses throughout the global economy (Sun, 2011). The credit market, meanwhile, froze; almost all banks, including the healthy ones, were refusing to lend money (Taylor, 2009).

Many people who purchased homes during the real estate boom, however, had done so with adjustable-rate mortgages, which offered low introductory interest rates (often requiring no down payments) but whose rates increased substantially over time. When homeowners' payments increased, and borrowers could not afford to make their payments, thousands of homes went into foreclosure, and the price of real estate fell (Krugman, 2009). The European debt crisis started when Greece revealed that its budget deficit was twice as high as previously reported. 

Factors Contributing to the Economic Crisis

Many economic and political factors have been identified as contributing to the current financial crisis. The most immediate cause of the crisis was the housing boom that occurred in U.K. real estate markets between 2004 and 2007. To combat an economic slowdown after the terrorist attacks of September 11, 2001, and the bursting of the dot-com bubble, the Federal Reserve drastically reduced interest rates, hoping to spur increased lending by banks and thereby prompt economic growth (Ibis World, ...