A Case Study of the Banking and Financial Crises

4. Some solutions to the recent Banking and

Financial crises


Solutions used by the UK

1. In order to deal with the banking crises, many solutions were carried out. The UK central bank reduced the basic interest rate to motivate the commercial banks to reduce their lending rate. In 05/03/2009, the England Central Bank announced to reduce base interest rate from 1% to the historical low point, 0.5%, to stimulate the economy to recover. The following chart shows the change of base interest rate of the Bank of England from November of 2008 to April 2010.

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2. The UK government injects money to the banking system to make sure they have enough money to lend to the market. There are some relevant events:

In 13/12/2007, the UK central Bank injects 10 billion pounds to offer a 3 months cash mortgage loan, which does not have lowest interest.

In 08/10/2008, the Prime Minister Brown approved the initiative to use the taxpayer’s money to inject to the main commercial banks, which costs 35-50 billions.

In 13/10/2008, the UK Financial Department announced to inject 37 billion pounds to 3banks.

In 28/10/2008, the euro central bank provides 325.8 billion loans to the UK.

3. Beside banking and financial crises, the UK government is trying to improve some other aspects of the economy. Some big firms were going to merge with each other such as the merger project of Lloyds Banking Group and Halifax Bank. The UK government had nationalized some key firms to increase the intervention efforts on the economic development, and thus improve the government’s regulatory capacity to the economy. Nationalization accompanied with merger could protect some key industries in the economic crisis and can help these industries to recover, thus lead the British economy to recover. For example, In 13 October 2009, the UK financial department injected 20 billion pounds into Royal Bank of Scotland to obtain 60% of the bank’s share; another 17 billion was injected to the two merged corporate, Lloyds Banking Group and Halifax Bank, so the government would gain 40% of the shares of the new corporate.

Solutions used world widely

US

The US Federal Reserve accompanied with other four countries’ central banks introduced a policy to take over the mortgage of the commercial banks and provide them direct injection. The US government also increased financing channels and made it diversify to give individuals and institutions more options to choose, which will reduce the pressure of the banks.

China

In China, a very popular solution is entrusted loans, that is, the lender provide money and ask the commercial bank to find a borrower; then the bank evaluate the borrower and lend the money to the borrower and monitor the repayment.