A Case Study of the Banking and Financial Crises

2. The sources that have caused recent

banking and financial crises

The recent banking and financial crises in the UK were the consequence of the world’s economic crisis, which was originally caused by the subprime crisis in the US. The subprime problem first appeared in the spring of 2006, and gradually come to the surface in August 2007. During the same period of time, central banks in different countries increased the interest rate in order to solve the inflation problem. However, the rate had risen too quickly so that large amount of default appeared, real estate bubble began to burst, and the problem became worse and consequently broke out widely. Hence, subprime problem was renamed as subprime crisis. It has led to huge losses to many world-renowned financial institutions, and also caused the liquidity shortage of the financial markets in many countries. At the same time, the world economy continues to go down and thus the financial crises emerged because a huge loss on banking system that banks want to protect themselves and avoid further losses.

In this situation, banks will make lending decisions mostly based on the prediction of the market, but a long term economy down turn will exceed the bearing capability of many borrowers, leave them bankruptcy, and consequently default to the lenders. For the UK, as an economy who had invested a lot in the US, the UK was one of the earliest nations who had been affected by the crash in the US. With a huge loss on banking system and disappointing economic prediction, credit crunch in the UK is even more serious than it was in the US.

The Financial crisis is just like a destructive big fire. Do you think banks will let their money burnt 

and disappear?   NO!